Mechanisms to Meet/Beat Analyst Earnings Expectations in the Pre- and Post-Sarbanes-Oxley Eras
44 Pages Posted: 8 Oct 2008
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Mechanisms to Meet/Beat Analyst Earnings Expectations in the Pre- and Post-Sarbanes-Oxley Eras
Mechanisms to Meet/Beat Analyst Earnings Expectations in the Pre- and Post-Sarbanes-Oxley Eras
Date Written: April 2007
Abstract
This paper asks two questions. First, has the prevalence of expectations management tomeet/beat analyst expectations changed in the aftermath of the 2001-2002 accountingscandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, has the mixamong the three mechanisms used for meeting earnings targets: accrual earningsmanagement, real earnings management, and earnings expectations management shiftedin the Post-SOX Period? We document that the propensity to meet/beat analyst expectations has declined significantly in the Post-SOX Period. Our primary findings explain this pattern. In particular, we find a decline in the use of expectations management and accrual management, and no change in real earnings management in the Post-SOX Period relative to the preceding seven-year period. Our results are robust to controlling for varying macro economic conditions. These findings contribute to the academic literature, investors, and regulators.
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