Gaming the Float: How Managers Respond to EPS-based Incentives

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Table 1: Summary Statistics This table presents summary statistics of the key variables used in this study. Shares outstanding (millions) is the total number of shares outstanding (CRSP) at the end of the quarter. EPS is the primary earnings per share (COMPUSTAT). Net Income is the reported net income at the fiscal quarter end. Net Income Vol is the standard deviation of net income over the past 12 qtrs. Net Income Vol - Naive is the standard deviation of seasonally adjusted net income over the past 12 qtrs. Net Income Vol - Analyst is the standard deviation of net income minus the consensus IBES median forecast of net income over the previous 12 qtrs. Stock Volatility is the standard deviation of daily stock returns over the past year. Market Capitalization is the total market capitalization in millions at the quarter end. Institutional Ownership is the % of institutional ownership from Thomson 13(f). Incentive Compensation is calculated as 1-(Salary/TDC1). Num of Analysts is the number of analysts cover the stock during the quarter. Annual Stock Return is the past 12 month stock return. Amihud is the log of the Amihud ratio calculated over the past year. Split ratio is the ratio to adjust shares at stock split announcement. Share price is the stock price at the end of the quarter. Age is the years since IPO. The sample is from 1984-2012. Variable Mean P25 Median P75 STD Shares Outstanding 83.85 10.16 23.55 56.75 346.78 EPS 0.20 -0.02 0.19 0.47 1.19 Net Income 34.48 -0.30 3.05 17.65 388.95 Net Income Vol 51.48 1.59 5.23 20.57 347.76 Net Income Vol - Naive 40.38 1.47 4.75 18.20 264.06 Net Income Vol - Analyst 32.04 0.58 2.38 11.01 250.83 Stock Volatility 3.30 1.82 2.68 4.04 2.35 Market Capitalization 2766 95 338 1316 13069 Institutional Ownership 47.97 24.34 46.85 70.22 27.78 Incentive Compensation 66.65 54.04 73.24 85.19 24.46 Num of Analysts 4.24 1 3 5 4.35 Annual Stock Return 15.74 -21.13 5.96 34.78 81.12 Amihud -1.05 -2.90 -0.98 0.80 2.57 Split Ratio 1.64 1.50 1.50 2.00 0.68 Share Price 22.68 7.70 17.25 30.75 24.94 Age 16.1 5.5 11.2 21.2 15.2 32
Figure 1: Example of the relationship between earnings growth, shares outstanding and EPS. This figure shows the mechanical relationship between earnings growth, shares outstanding, and EPS as a result of EPS rounding. The Base Case presents an example of a firm with $100 of expected earnings and 1000 shares outstanding with a target size of ±5% of expected earings. Earnings Growth (1000 shares) presents an example of the same 1000 shares outstanding and expected earnings of $200. The target size is ±2.5% of expected earnings. Earnings Growth and 2:1 Split presents the same example but with 2000 shares outstanding. The target size returns to ±5%. Base Case (1000 Shares) EPS= $0.10 Earnings=$95 E[Earnings]=$100 +/- 5% of E[Earnings] Earnings=$105 Earnings Growth (1000 Shares) EPS= $0.20 E[Earnings]=$200 Earnings=$195 Earnings=$205 +/- 2.5% of E[Earnings] Earnings Growth and 2:1 Split (2000 Shares) EPS= $0.10 Earnings=$190 E[Earnings]=$200 +/- 5% of E[Earnings] Earnings=$210 33
Page 1 and 2: Gaming the Float: How Managers Resp
Page 3 and 4: earnings will choose more shares ou
Page 5 and 6: targets. Managers change the target
Page 7 and 8: it does not increase as the firm’
Page 9 and 10: meeting that forecast. This leads t
Page 11 and 12: 2.2 Time series determinants of sha
Page 13 and 14: ealized but before they are reporte
Page 15 and 16: A and incentive compensation in Pan
Page 17 and 18: elationship between incentive compe
Page 19 and 20: the view that increases in forecast
Page 21 and 22: In columns 2 and 3, we measure our
Page 23 and 24: atypical amount. In Table 9, we rep
Page 25 and 26: price levels observed in the data.
Page 27 and 28: management tools. 27
Page 29 and 30: De Angelis, D. and Y. Grinstein (20
Page 31: A Appendix We show that a drop in a
Page 35 and 36: Figure 3: Median Shares Outstanding
Page 37 and 38: Table 2: Determinants of Shares Out
Page 39 and 40: Table 4: Shares Outstanding: First
Page 41 and 42: Table 6: Changes in Shares Outstand
Page 43 and 44: Table 8: Changes in Shares and Acco

Gaming the Float: How Managers Respond to EPS-based Incentives

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