Rounding phenomenon in reported earnings and revenues: evidence from Japan

Purpose - – The paper aims to examine the rounding phenomenon in reported earnings and revenues of Japanese publicly listed firms to achieve key reference points. The paper also examines the changes of rounding behavior among Japanese publicly listed firms around the asset bubble burst in 1990. Design/methodology/approach - – To test the null hypothesis of no managerial effort to round earnings and revenues, the paper compared the observed frequency of each number in the second place of earnings and revenues numbers to the expected occurrences of the number as predicted by Benford's law. Findings - – The paper finds that rounding manipulation is prevalent in the reporting of both earnings and revenues among the firms. The paper also documents that rounding manipulation is more severe in reported earnings than that in reported revenues. The paper finds constant rounding manipulation behavior in reported earnings upon the asset bubble bursting in 1990; however, the magnitude of rounding manipulation in reported revenues decreases significantly after the bubble burst. This finding supports the argument that Japanese firms tend to focus more on short-term performance in the post-bubble era. Originality/value - – This paper is the first study to focus on rounding behavior in reported revenues of Japanese firms. As important as the earnings are on firms' valuation and contractual measures, revenues deserve intensive awareness in the financial studies. The study also explores the changes of Japanese managers' rounding manipulation behavior since the asset bubble burst in 1990. Documentation of the structural changes in the lost decades in Japan can provide valuable lessons for other countries in similar situations.