Rounding-up in reported EPS, behavioral thresholds, and earnings management

Rounding-up in reported EPS, behavioral thresholds, and earnings management Reported earnings per share (EPS) are frequently rounded to the nearest cent. This paper provides evidence that firms manipulate earnings so that they can round-up and report one more cent of EPS. Specifically, we examine the digit immediately right of the decimal in the calculated EPS number expressed in cents. Evidence is presented that firms are more likely to round-up when managers ex ante expect rounding-up to meet analysts’ forecasts, report positive profits, or sustain recent performance. Further investigation provides evidence that working capital accruals are used to round-up EPS. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

Rounding-up in reported EPS, behavioral thresholds, and earnings management

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Publisher
Elsevier
Copyright
Copyright © 2003 Elsevier Science B.V.
ISSN
0165-4101
D.O.I.
10.1016/S0165-4101(02)00096-4
Publisher site
See Article on Publisher Site

Abstract

Reported earnings per share (EPS) are frequently rounded to the nearest cent. This paper provides evidence that firms manipulate earnings so that they can round-up and report one more cent of EPS. Specifically, we examine the digit immediately right of the decimal in the calculated EPS number expressed in cents. Evidence is presented that firms are more likely to round-up when managers ex ante expect rounding-up to meet analysts’ forecasts, report positive profits, or sustain recent performance. Further investigation provides evidence that working capital accruals are used to round-up EPS.

Journal

Journal of Accounting and EconomicsElsevier

Published: Apr 1, 2003

References

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