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Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods


Daniel A. Cohen


University of Texas at Dallas - Naveen Jindal School of Management

Aiyesha Dey


University of Minnesota - Carlson School of Management

Thomas Z. Lys


Northwestern University - Kellogg School of Management

February 1, 2005


Abstract:     
We document that firms' management of accounting earnings increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX), with a significant increase during the period prior to SOX, followed by a significant decline after passage of SOX. However, the increase in earnings management preceding SOX was primarily in poorly performing industries. We also show that the informativeness of earnings increased steadily over time, and there was no significant change in earnings informativeness following the passage of SOX. Further, we find that earnings management increased the absolute informativeness of earnings, but reduced the informativeness for a given earnings surprise, as well as reduced the abnormal return for a given amount of earnings surprise. Finally, the evidence supports the hypothesis that the opportunistic behavior of managers, primarily related to the fraction of compensation derived from options, was significantly associated with earnings management in the period preceding SOX.

Number of Pages in PDF File: 44

Keywords: Earnings Management, Sarbanes Oxley Act

JEL Classification: G14, G18, G30, G38, K22, M41, M43

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Date posted: January 9, 2004  

Suggested Citation

Cohen, Daniel A. and Dey, Aiyesha and Lys, Thomas Z., Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods (February 1, 2005). Available at SSRN: http://ssrn.com/abstract=658782 or http://dx.doi.org/10.2139/ssrn.658782

Contact Information

Daniel A. Cohen
University of Texas at Dallas - Naveen Jindal School of Management ( email )
P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-4772 (Phone)
972-883-6811 (Fax)
Aiyesha Dey
University of Minnesota - Carlson School of Management ( email )
321 Nineteenth Avenue South
Minneapolis, MN 55455
United States
6126268626 (Phone)
Thomas Z. Lys (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)
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