The 'Numbers Game' in The Pre-and Post-Sarbanes-Oxley Eras

Abstract:     
This paper asks two questions. First, has the prevalence of expectations management to meet/beat analyst expectations changed in the aftermath of the 2001-2002 accounting scandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, has the mix among the three mechanisms used for meeting earnings targets: accrual earnings management, real earnings management, and earnings expectations management shifted in the Post-SOX Period? We document that the propensity to meet/beat analyst expectations has declined significantly in the Post-SOX Period. Our primary findings explain this pattern. In particular, we find a decline in the use of expectations management and accrual management, and no change in real earnings management in the Post-SOX Period relative to the preceding seven-year period. Our results are robust to controlling for varying macro economic conditions. These findings contribute to the academic literature, investors, and regulators.

Number of Pages in PDF File: 45

Keywords: Earnings expectations, Analysts' forecasts, Expectations management, Earnings management, Real Earnings Management, Sarbanes Oxley

JEL Classification: G14, G29, G38, M41, M43

working papers series