Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management
Santa Clara University - Leavey School of Business
University of California, Irvine
Sonja O. Rego
Indiana University - Kelley School of Business
Journal of Law and Economics, February 2008
The Sarbanes-Oxley Act of 2002 (SOX) is the most important legislation affecting corporate financial reporting enacted in the United States since the 1930s. Its purpose is to improve the accuracy and reliability of accounting information reported to investors. We examine stock price reactions to legislative events surrounding SOX, and focus on whether such stock price effects are related cross-sectionally to the extent firms had managed their earnings. Our univariate results indicate significantly positive abnormal stock returns associated with SOX events, and our primary analyses reveal considerable evidence of a positive relation between SOX event stock returns and extent of earnings management. These results are consistent with investors anticipating that SOX would constrain earnings management and enhance the quality of financial statement information more, the more firms had managed their earnings.
Keywords: Sarbanes-Oxley, earnings management, event study
JEL Classification: G38, G12, M41, M43, M49Accepted Paper Series
Date posted: October 26, 2006
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