Rounding & Gaming Numbers: Human Nature? (...any unspoken implications for Efficient Market Hypothesizers?) Rounding-up in Reported EPS, Behavioral Thresholds, and Earnings ManagementReported 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.Full PaperAnomalies and Unusual Patterns in Reported Earnings: Japanese Managers Round Earnings Using Benford's law, this study documents pervasive evidence that managers of Japanese firms tend to engage in earnings manipulative activities of rounding earnings numbers to achieve key reference points. Similar to Carslaw (1988) and Thomas (1989), we find that the first digit of earnings numbers is often emphasized by the management. We also find that key reference points are not limited to the first digit. The second, third, or even fourth digits are sometimes used as the reference points of the rounding earnings behavior. Finally, our results show that the incentives of rounding earnings numbers are negatively associated with the distance of pre-rounded earnings to the next reference point. Full PaperRounding of Analyst Forecasts We find that analyst forecasts of earnings per share occur in nickel intervals at a much greater frequency than do actual earnings per share. Analysts who round their earnings per share forecasts to nickel intervals exhibit characteristics of analysts that are less informed, exert less effort, and have fewer resources. Rounded forecasts are less accurate and the negative relation between rounding and forecast accuracy increases as the rounding interval goes from nickel to dime, quarter, half-dollar, and dollar intervals. An examination of announcement period returns provides evidence that market expectations more closely align with consensus forecasts including rounded forecasts and then correct toward the more accurate consensus forecasts excluding rounded forecasts. Finally, exclusion of rounded forecasts decreases forecast dispersion.Full PaperSome more stock market research that reaches the remarkable conclusion that people are people:Traditional vs. Behavioral Finance: The traditional finance researcher sees financial settings populated not by the error-prone and emotional Homo sapiens, but by the awesome Homo economicus. The latter makes perfectly rational decisions, applies unlimited processing power to any available information, and holds preferences well-described by standard expected utility theory.Anyone with a spouse, child, boss, or modicum of self-insight knows that the assumption of Homo economicus is false. Behavioralists in finance seek to replace Homo economicus with a more-realistic model of the financial actor. Richard Thaler, a founding father of behavioral finance, captured the conflict in a memorable National Bureau of Economic Research (NBER) conference remark to traditionalist Robert Barro: “The difference between us is that you assume people are as smart as you are, while I assume people are as dumb as I am.” Thaler’s tongue-in-cheek comparison aptly illustrates how the modest substantive differences in traditionalist and behavioralist viewpoints can be exaggerated by larger differences in framing and emphasis, bringing to mind the old quip about Britain and America being “two nations divided by a common tongue.” (For what it is worth, when confirming this account of the exchange, Thaler reports that Barro agreed with his statement.)Full PaperNature or Nurture: What Determines Investor Behavior? Using data on identical and fraternal twins' complete financial portfolios, we decompose the cross-sectional variation in investor behavior. We find that a genetic factor explains about one third of the variance in stock market participation and asset allocation. Family environment has an effect on the behavior of young individuals, but this effect is not long-lasting and disappears as an individual gains experiences. Frequent contact among twins results in similar investment behavior beyond a genetic factor. Twins who grew up in different environments still display similar investment behavior. Our interpretation of a genetic component of the decision to invest in the stock market is that there are innate differences in factors affecting effective stock market participation costs. We attribute the genetic component of asset allocation - the relative amount invested in equities and the portfolio volatility - to genetic variation in risk preferences. Full PaperBottom line:The Efficient Market Hypothesis and its Critics
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