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 - Carlson School of Management
Thomas Z. Lys
Northwestern University - Kellogg School of Management
AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper
We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined 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 with increases in the fraction of equity based compensation.
Number of Pages in PDF File: 52
Keywords: Earnings Management, Sarbanse-Oxley Act, Executive Compensation
JEL Classification: M41, M43, J33, G34, G38working papers series
Date posted: September 28, 2005
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