Did Accrual Earnings Management Decline and Real Earnings Management Increase Post-SOX? A Re-Examination Over an Extended Post-SOX Period and A Closer Look at REM-AEM Substitution

Abstract

A widely cited paper, Cohen, Dey, and Lys (2008, hereinafter CDL), examines accrual (AEM) and real earnings management (REM) pre- and post-Sarbanes Oxley and provides evidence that, in the period immediately following SOX, accruals management declined and was substituted by REM. We re-visit CDL and ask whether CDL’s main results extend to recent periods and hold using updated research design choices. We find AEM declines in the period immediately after SOX, but the results are sensitive to some design choices. We also find AEM generally declines over our entire extended post-SOX period, suggesting that the components of SOX were largely successful in constraining AEM. REM is higher post-SOX but with an insignificant trend over the entire extended post-SOX period. Additionally, the results indicate REM and AEM behave as substitutes in the period preceding SOX, but the substitution effect significantly weakens post-SOX.

Keywords: accrual-based and real earnings management, SOX, re-examinations