IDEAS home Printed from
   My bibliography  Save this paper

Earnings management induced by cognitive reference points




Previous studies [Carslaw (1988), Thomas (1989) and Niskanen and Keloharju (2000)] have shown that companies’ managers tend to round up the first digits of reported earnings (i.e. for companies reporting profits). According to Carslaw (1988), this type of behaviour is inspired by the existence of the so-called “$ 1.99” phenomenon where a price of $ 1.99 is perceived as being abnormally lower than one of $ 2.00. In the current study, we try to determine whether managers of U.K. listed companies also engage in this type of ‘earnings rounding-up behaviour’. Analogous to the earlier studies, our study compares observed and expected (i.e. estimated using Benford’s Law) frequencies for the second-from-the-left digit in reported earnings. Our results suggest that managers of U.K. listed companies tend to round up reported pre-tax income, in a way that increases the first digit by one, when they are faced with a nine in the second-from-the-left position for this particular earnings measure. The major contribution of the current study is that it introduces discretionary accruals in this line of research. Discretionary accruals were estimated using both the Jones model (1991) and the modified Jones model as proposed by Dechow, Sloan and Sweeney (1995). Our results clearly suggest that discretionary accruals are used in order to round up reported earnings figures. Moreover, discretionary accruals enabled us to increase the power of the tests used in previous studies.

Suggested Citation

  • VAN CANEGHEM, Tom, "undated". "Earnings management induced by cognitive reference points," Working Papers 2002003, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2002003

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ant:wpaper:2002003. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joeri Nys). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.