Round number reference points and irregular patterns in reported gross margins
Matthew Cedergren, Assistant Professor of Accounting
M. Cedergren., V. Li ; Round number reference points and irregular patterns in reported gross margins. Review of Accounting Studies (forthcoming) https://doi.org/10.1007/s11142-023-09780-x
Abstract
We find irregular patterns in the distribution of firms’ reported quarterly gross margin percentages. Specifically, there is significant bunching around percentage integers that are highly round (e.g., multiples of 10, such as 30%, 40%, etc.) or are neatly divisible (e.g., 25%, 75%), compared to what is predicted by counterfactual distributions. Further investigation reveals that highly round gross margin firms are smaller, exert higher effort, achieve higher productivity, have more difficult goals, and pay their CEOs with a higher portion of fixed income. We also find that highly round gross margins are associated with superior performance. Additionally, we do not find consistent evidence that highly round gross margin reference points are linked to external rewards. Collectively, our evidence is consistent with reference-dependent preferences for highly round gross margins likely being driven by intrinsic (rather than extrinsic) motivations.