Big Surprise

What causes this?

Could it be ………… Satan?

Barry Ritholtz finds a rather delicious piece of information showing that fraud in earnings statements is rather widespread, to be fair, it originally came from the Wall Street Journal, but since that's behind a pay wall, and Ritholtz summarizes nicely, he gets the link.

You see, when you look at companies reporting earnings per share, the general number is rounded to the whole cent, but when you delve deeper into the numbers you get fractions of a cent per share, and lo and behold, a fraction of 0.4¢ a share is conspicuously absent from these numbers?

Why would this be?

It's not the work of Satan, but the work of accountants.

Basically, if your earnings are 13.4¢ a share, you announce earnings of 13¢ a share, but if they are 13.5¢ a share, you announce earnings of 14¢ a share.

This number is statistically significant.

If you saw this in a poll you would immediately conclude that someone was just making sh%$ up.

Quoting Ritholtz, quoting the Journal:

The study, which examined nearly half a million earnings reports over a 27-year period, reached its conclusion by going beyond the standard per-share earnings results that are reported in pennies and analyzing the numbers down to the 10th of a cent.

That deeper look showed that companies tend to nudge their earnings numbers up by a 10th of a cent or two. That lets them round results up to the highest cent. 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.”

I love the euphemism “meet investor expectations” as opposed to the more colloquial “lie cheat and steal.”

It also points out the need for the SEC to develop a Department of Quantitative Analysis filled with math geeks and computers, doing nothing but sifting through data looking for investor fraud. I’d bet they would get more convictions than the rest of the SEC combined. (If someone in the SEC would call me, I’ll help you set it up).

(emphasis mine)

This is the sort of application of "quants" in finance that I could wholeheartedly get behind.