Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods
Daniel A. Cohen
University of Texas at Dallas - Naveen Jindal School of Management
University of Minnesota - Twin Cities - Carlson School of Management
Thomas Z. Lys
Northwestern University - Kellogg School of Management
NYU Working Paper No. 2451/27548
We document that accrual-based earnings management increased steadily from 1987 untilthe passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant declineafter the passage of SOX. Conversely, the level of real earnings management activitiesdeclined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also find evidence that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. Finally, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent withincreases in the fraction of equity based compensation.
Number of Pages in PDF File: 52
Date posted: October 8, 2008
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