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
University of Minnesota - Twin Cities - Carlson School of Management
Thomas Z. Lys
Northwestern University - Kellogg School of Management
February 1, 2005
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
Date posted: January 9, 2004
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