Discontinuities in Earnings and Earnings Change Distributions after J-SOX Implementation: Empirical Evidence from Japan

33 Pages Posted: 25 Jun 2015 Last revised: 27 Oct 2017

See all articles by Masahiro Enomoto

Masahiro Enomoto

Kobe University - Research Institute for Economics & Business Administration

Tomoyasu Yamaguchi

Chuo University - Faculty of Commerce

Date Written: October 19, 2016

Abstract

Prior research finds that the Sarbanes-Oxley Act (US-SOX) of 2002 has affected earnings management in the United States. Cohen et al. (2008) indicate that accrual-based earnings management has declined since the passage of US-SOX, while real earnings management has increased. Further, Gilliam et al. (2015) show that the zero-earnings discontinuity has disappeared since its passage, indicating that earnings management to avoid losses has decreased as a result. In Japan, the Financial Instruments and Exchange Act of 2006, the so-called Japanese version of SOX (J-SOX), was implemented for fiscal years starting in April 2008. Similar to US-SOX, J-SOX aims to reinforce the corporate governance of financial reporting. This study investigates whether the discontinuity in the distributions of earnings and earnings changes disappeared after J-SOX implementation. In contrast to US-SOX, the results indicate that the discontinuity in the earnings distribution at zero did not disappear after J-SOX implementation. However, the discontinuity in the earnings change distribution at zero almost disappeared after J-SOX implementation, indicating that earnings management to avoid earnings decreases became less prevalent. In addition, the results indicate that the discontinuity in the distribution of earnings changes before J-SOX implementation was mainly caused by habitual beaters and that earnings management by habitual beaters to avoid earnings decreases was less prevalent after J-SOX implementation.

Keywords: earnings distribution, earnings management, loss avoidance, earnings decrease avoidance, Sarbanes-Oxley Act, Financial Instruments and Exchange Act of Japan

JEL Classification: G38, M41, M48

Suggested Citation

Enomoto, Masahiro and Yamaguchi, Tomoyasu, Discontinuities in Earnings and Earnings Change Distributions after J-SOX Implementation: Empirical Evidence from Japan (October 19, 2016). Journal of Accounting and Public Policy 36 (1): 82-98, 2017, Available at SSRN: https://ssrn.com/abstract=2622396 or http://dx.doi.org/10.2139/ssrn.2622396

Masahiro Enomoto

Kobe University - Research Institute for Economics & Business Administration ( email )

2-1, Rokkodai cho
Nada-ku
Kobe, 657-8501
Japan

Tomoyasu Yamaguchi (Contact Author)

Chuo University - Faculty of Commerce ( email )

742-1, Higashinakano
Hacihoji
Tokyo, 192-0393
Japan

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