Rounding-Up in Reported Eps, Behavioral Thresholds, and Earnings Management

34 Pages Posted: 29 Jan 2003 Last revised: 14 Jul 2010

See all articles by Somnath Das

Somnath Das

University of Illinois at Chicago

Huai Zhang

Nanyang Business School, Nanyang Technological University

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 earnings per share 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.

Keywords: behavioral thresholds, earnings management, earnings per share, rounding

JEL Classification: M41, M43, G14

Suggested Citation

Das, Somnath and Zhang, Huai, Rounding-Up in Reported Eps, Behavioral Thresholds, and Earnings Management. Journal of Accounting and Economics, Vol. 35, No. 1, pp. 31-50, April 2003, Available at SSRN: https://ssrn.com/abstract=372344

Somnath Das (Contact Author)

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
312-996-4482 (Phone)
312-996-4520 (Fax)

Huai Zhang

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65-6790-4097 (Phone)

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