The "Book-Cooking" Index Soars To All Time Highs

Everyone has heard of the Big Mac [7]Index, the Misery Index [8], even
the Shoe Thrower [9]Index. But the Book Cooking Index? This latest
addition to the compendium of oddly named yet extremely fascinating
"indices" is based around the statistical irregularity known as
Benford's law, according to which within sets of numbers that span
orders of magnitude, the distribution of first digits is strikingly
regular: numbers beginning in 1 occur about 30% of the time, those
beginning in 2 about 18% of the time, falling to roughly 5% of the
time for the number 9. Specifically, as noted by the keenly observant
Jialan Wang of Washington University in St. Louis, "there are more
numbers in the universe that begin with the digit 1 than 2, or 3, or
4, or 5, or 6, or 7, or 8, or 9. And more numbers that begin with 2
than 3, or 4, and so on. This relationship holds for the lengths of
rivers, the populations of cities, molecular weights of chemicals, and
any number of other categories." The most curious application of this
law resides in the field of corporate fraud, "because deviations from
the law can indicate that a company's books have been manipulated."
Here is where things get interesting for fraudulent corporate America:
the inquisitive Wang "downloaded quarterly accounting data for all
firms in Compustat, the most widely-used dataset in corporate finance
that contains data on over 20,000 firms from SEC filings" and "used a
standard set of 43 variables that comprise the basic components of
corporate balance sheets and income statements." Her results were, in
a word, startling.


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