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Quadrophobia: Strategic Rounding of EPS Data

Citation

Publication Date: 
October 14, 2009
Format: 
Working Paper
Bibliography: Joseph A. Grundfest and Nadya Malenko, Quadrophobia: Strategic Rounding of EPS Data, Rock Center for Corporate Governance Working Paper, No. 65 (2009) (revised 2011).

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Earnings management to round up reported EPS causes under-representation of the number four in the first post-decimal digit of EPS data, or "quadrophobia." We develop a simple measure of earnings management based on a firm's history of quadrophobia. Quadrophobia is pervasive and persistent, and predicts future restatements, SEC enforcement actions, and class action litigation. Quadrophobia, even if the result of proper accounting practices, thus appears correlated with a propensity to engage in other problematic accounting practices. The incidence of quadrophobia increases (declines) when firms gain (lose) analyst coverage and is more pronounced in pro forma earnings in a manner consistent with capital market pressure causing strategic rounding.