Rounding of Earnings Per Share and Managerial Insider Trading

• In Event: Even More Financial Reporting

Abstract

Prior research (e.g., Thomas 1989; Das and Zhang 2003) provides evidence of managers “rounding” reported earnings per share (EPS). We explore whether managerial trading incentives can help explain the rounding pattern of EPS. Specifically, we hypothesize that managers anticipate a disproportionately larger price reaction to rounded EPS and exert additional effort to round EPS when they plan to sell shares following the earnings announcement. Consistent with this hypothesis, we find that managers who round diluted EPS, but not basic EPS, have higher managerial insider sales following the earnings announcement relative to managers who do not round diluted EPS. Furthermore, we find that the positive association between rounding of diluted EPS and subsequent stock sales undertaken by chief financial officers (CFOs) is stronger when the level of abnormal stock repurchases is higher, consistent with managers’ strategic behavior rather than passive insider trading in response to performance.

Authors

• Robert Kim, University of Massachusetts-Boston

• Yong Gyu Lee, Sungkyunkwan University

• Gerald Lobo, University of Houston-Houston