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A corporation’s earnings and associated ratios, such as earnings per share, are metrics that investors and...

A corporation’s earnings and associated ratios, such as earnings per share, are metrics that investors and other stakeholders use when making decisions. The SEC recently began investigating corporations for manipulating earnings via rounding errors. In the early 2000s, it became clear that corporation’s rarely missed earnings estimates provided by financial analysts. Offer your opinion on the ethics underlying these practices, any possible broader implications of such behavior, and any real-life experiences you may have come across that are similar. See Assigned Readings “Related to agency theory and the goal of financial management”

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Expert Solution

As per SEC, companies can round up earnings per share estimate to next highest whole number if digit after decimal is 5 and above. If it is 4 or less, they have to report to lowest integer. Hence regulators have been probing whether companies have been wrongfully rounding up earnings per share.

Agency theory is related to different stakeholders having different interests which is not exactly aligned to company's growth.Company managers are looking to project company in a good light to maximize market value which inturn increases their personal wealth. Fund managers/Investment advisors look to attract retail/institutional investors to increase their year end bonus. Higher dividend per share shows confidence in company's future cashflow forecasts. However this illusion is not going to last and investors will offload the shares at first sign of trouble and reaction will be even more drastic due to unrealistic high expectations set.

All these work against the goal of financial management which is to maximise a company's profit and market share. Hence such practices are highly unethical. When investors cannot rely on the information available and lose confidence in company financial reports, there is high chance they will move money to safer instruments. This will adversely affect when company tries to raise money for expansion or other purposes through market in turn affecting the economy as a whole

jeff jeffy answered 1 year ago
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