Managerial Entrenchment and Value-Relevance of Earnings During the Pre- and Post- Sarbanes Oxley Periods
49 Pages Posted: 5 Oct 2007
Date Written: September 2007
This study examines the effect of the passing of Sarbanes-Oxley Act (SOX) of 2002 as well as managerial entrenchment characteristics of corporations on the value-relevance of earnings. Our sample of observations is partitioned into three sub-periods: the Pre-Scandal (Pre-SCA) period, the Enron scandal (SCA) period, and the period after the passage of the Sarbanes-Oxley Act (Post-SOX). We find that the value-relevance of earnings is significantly different for the three sub-periods. Using the existence of anti-managerial-entrenchment mechanisms as a measure of good corporate governance, we find that these measures have a positive impact on the value-relevance of earnings only during the SCA period. Furthermore, the positive impact only applies to firms that engaged in income-decreasing earnings managements during the prior year. We conclude that, from the standpoint of investors, there appears to be a substitution effect between good firm-specific corporate governance mechanisms and the strictness of the regulatory environment.
Keywords: Managerial Entrenchment, Corporate Governance, Value relevance of earnings, Sarbanes-Oxley Act
JEL Classification: G34, G14, K22
Suggested Citation: Suggested Citation