Detecting Cosmetic Debt Management Using Benford's Law

Dominique Geyer () and Christoph Drechsler
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Dominique Geyer: Audencia Recherche - Audencia Business School
Christoph Drechsler: University College of Dublin - UCD - University College Dublin [Dublin]

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Abstract: Benford's law states that the frequency of first significant digit in certain samples decreases as those digits increase. This law is used in accounting to find rounding behavior. Several studies provided evidence that firms may round up earnings when they are just below reference points denoted by Nx10k. Most studies are focused on earnings variables. Few studies are focused on other accounting variables like sales for example (Jordan & Alii, 2009; Geyer, 2012). No previous study examines accounting variable from balance sheet (excepted earnings of course). The aim of this short paper is to investigate rounding behavior of long term debt. Using a sample of US public companies, we observe that US firms round down the total long term debt considering two cognitive points: Nx10k and (2xN+1)x5x10j (N is an integer between 1 to 9; k is an integer from 1 and j is an integer from 0). In other words, US public firms exercise Cosmetic Debt Management.

Keywords: Cosmetic Debt Management; Benford's Law; Rounding Behavior; Cosmétique comptable de la dette; loi de Benford; comportement d'arrondi (search for similar items in EconPapers)
Date: 2014-09
Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-01059758
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Citations: View citations in EconPapers (2)

Published in Journal of Applied Business Research, 2014, 30 (5), pp.1485-1492

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