If you care about money, the economy and corporate America, earnings season matters. USA TODAY’S Matt Krantz breaks it down.
In a case of possible “quadrophobia,” the nation’s top Wall Street regulator reportedly is investigating whether publicly traded U.S. companies have been rounding up their quarterly earnings to the next highest cent.
The Securities and Exchange Commission has sent inquiries to at least 10 companies, asking about accounting details of any earnings adjustments that could nudge their earnings per share higher, The Wall Street Journal reported Friday, citing unidentified people familiar with the matter.
The SEC declined to comment, and the names of the companies that reportedly received the inquiries could not be determined.
Earnings per share, included with the financial results the companies’ publicly disclose and submit to the SEC, is a financial benchmark that’s closely watched by both Main Street investors and Wall Street analysts as a barometer of a company’s performance. A single penny’s difference can have a large impact on a company’s stock price.
The inquiry comes in the wake of an academic study that found the number four has been underrepresented “in the first post-decimal digit of” earnings per share data,” a finding the authors dubbed quadrophobia.
For example, if a company had quarterly earnings per share of 27.4 cents, it would round out to 27 cents. But if the earnings per share result came in at 27.5 cents, the company would round the result higher to 28 cents.
The authors of the study, conducted at Stanford University’s Rock Center for Corporate Governance, based their findings on an analysis of quarterly earnings per share reported by publicly traded companies from 1980-2013.
Using the statistical findings, authors Nadya Malenko and Joseph Grundfest developed a “Q-score” that tracks the history of quadrophobia in a given company’s quarterly results.
“Our main result is that firms with a history of quadrophobia are more likely to engage in potentially problematic accounting practices, leading to (financial earnings) restatements, SEC enforcement actions, and class-action securities fraud litigation,” the study said.
The frequency of the financial phenomenon increases or declines as companies gain or lose coverage by Wall Street financial analysts, the authors wrote in a summary of the findings. Quadrophobia “is more pronounced” in companies’ earnings results “in a manner consistent with capital market pressure causing strategic rounding,” the summary said.
As a result, the Q-score could be used in the future to assess company officials’ “motives for managing earnings” and capital market consequences of earnings management,” the study said.
Using the same analysis, SEC economists arrived at similar findings, the Journal report said.
The SEC addressed the broad issue of financial accounting quality in a 2012 speech by Craig Lewis, then the chief economist and director of the federal regulator’s Division of Risk, Strategy and Financial Innovation.
Lewis said the SEC was developing an “Accounting Quality Model” designed to assess how frequently companies’ financial statements “stick out from the pack,” of other firms competing in the same financial sector.
Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc
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