Bibliography: Joseph A. Grundfest and Nadya Malenko, Quadrophobia: Strategic Rounding of EPS Data, Rock Center for Corporate Governance Working Paper, No. 65 (2009) / John M. Olin Program in Law and Economics Working Paper, no. 388 (October 2009)
We hypothesize that earnings management causes quadrophobia, the under-representation of the number four in the first post-decimal digit of EPS data. We demonstrate that quadrophobia is pervasive, persistent, and follows economically rational patterns. Consistent with analyst coverage being a determinant of earnings management, quadrophobia increases (declines) when companies gain (lose) analyst coverage, and is more frequent when earnings are close to analyst forecasts. Persistent quadrophobes are more likely to restate financials and to be sued in SEC proceedings alleging accounting violations. Quadrophobia, even if itself legal, therefore appears to signal a propensity to engage in problematic accounting practices.