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

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

Alan D. Crane Rice University – Jesse H. Jones Graduate School of Business

Andrew Koch University of Pittsburgh – Finance Group

Chishen Wei University of Texas at Austin

June 27, 2013

We show that the likelihood of meeting earnings per share (EPS) forecasts is mechanically positively related to the number of shares outstanding. As a result, managers can affect the long run probability of meeting future EPS forecasts without managing earnings or affecting analysts’ forecasts. We find that firms with unpredictable earnings and firms with managers that have compensation more sensitive to EPS outcomes have more shares outstanding. To address causality, we find that an exogenous drop in the likelihood of meeting a forecast causes managers to increase shares outstanding, primarily through stock splits. Following an increase in shares, accounting and real earnings management drop, and the firm meets EPS forecasts more frequently going forward. Our results also offer a new explanation for stock splits; and provide evidence of a channel that relates EPS incentives to analysts’ forecast errors, stock liquidity, and price levels.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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