Accounting Webinar (2020-09)

Topic: Round Number Reference Points and Irregular Patterns in Reported Gross Margins

Speaker: Matthew Cedergren, University of Pennsylvania

Time: Thursday, June 25^th, 10:00-11:30 a.m

Place: Microsoft Teams

Abstract:

We observe irregular patterns in the distribution of firms’ reported quarterly gross margin percentages. Specifically, we find that there are significantly more firm-quarter observations just above whole percentage integers (e.g., between 55.0% and 55.1%) than there are just below whole percentage integers (e.g., between 54.9% and 55.0%), as compared to what would be expected by chance. These patterns are especially pronounced at percentage integers that are particularly “round” (e.g., multiples of 10, such as 30%, 40%, etc.) or are neatly “divisible” (e.g., 25%, 50%, 75%). Further investigation reveals that some investors reward firms with gross margins just above these psychological benchmarks at the time of the earnings announcement, but the presence of more sophisticated and informed investors mitigates such tendencies. In addition, firms reporting gross margins just above round numbers show deteriorated future operating performance. We also find no evidence that the irregular patterns of gross margins are related to the existence of management or analyst forecasts of gross margins or these forecasts themselves being round. Our findings are consistent with round numbers being used as implicit psychological reference points for gross margin, as suggested by the theory of reference-dependent preference, and with gross margins likely being managed to meet or beat these psychological benchmarks.

Introduction:

Professor Cedergren’s research focuses on disclosure activity and its relationship with securities litigation and regulations. In a recent paper in the Journal of Accounting and Economics, he investigates how managers’ trading activity affects their likelihood to warn of impending negative earnings surprises, and how potential class action plaintiffs use observed trading in deciding whether to initiate litigation when such negative surprises manifest. Professor Cedergren’s research interests also include initial public offerings, accounting issues in high-tech firms, and the capital market effects and information content of accounting measures.

Prior to his academic career, Professor Cedergren spent six years in the Assurance practice of PricewaterhouseCoopers LLP in San Jose, California, where his responsibilities included financial statement audits and Sarbanes-Oxley compliance for semiconductor clients in Silicon Valley. While at PwC, Professor Cedergren also worked on several stock option backdating investigations and related financial restatements, including those of Mercury Interactive, Marvell Technology Group, and Trident Microsystems.

Professor Cedergren obtained his PhD from the New York University Leonard N. Stern School of Business, his BBA/MAcc from the University of Wisconsin-Madison, and is a CFA charterholder and Certified Public Accountant (licensed in California).

//accounting.wharton.upenn.edu/profile/mcede/

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