The 'Numbers Game' in The Pre-and Post-Sarbanes-Oxley Eras
New York University
Daniel A. Cohen
University of Texas at Dallas - Naveen Jindal School of Management
August 20, 2008
NYU Law and Economics Research Paper No. 07-18
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, M43working papers series
Date posted: January 4, 2007 ; Last revised: August 21, 2008
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