How can the number ‘4’ help prove that a company is adjusting its earnings per share? Research analyzing earnings-per-share numbers down to a 10th of a cent found that the number ‘4’ appeared less often in the 10ths place than any other digit, suggesting that companies are “managing” financial results to avoid disappointing investors.
It has been dubbed as “quadrophobia”.
According to the Wall Street Journal, a new study by experts from Stanford University provides evidence suggesting many companies tweak quarterly earnings to meet investor expectations, and the companies that adjust most often are more likely to restate earnings or be charged with accounting violations. The pattern “appears to be a leading indicator of a company that’s going to have an accounting issue,” said Stanford’s Joe Grundfest, one of the report’s co-authors.
The study, which examined nearly half a million earnings reports over a 27-year period, showed that companies tend to nudge their earnings numbers up by a 10th of a cent or two. This is significant because that lets them round results up to the highest cent and investors often snap up shares of companies that beat earnings expectations, even by a cent, and, likewise, sell off shares of companies that don’t make their numbers.