Managerial Entrenchment and Value-Relevance of Earnings During the Pre- and Post- Sarbanes Oxley Periods

49 Pages Posted: 5 Oct 2007  

Anthony C. Ng

Monash University

Ferdinand A. Gul

Monash University Sunway Campus

Yaw M. Mensah

Rutgers Business School - Newark & New Brunswick

Date Written: September 2007

Abstract

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

Ng, Anthony C. and Gul, Ferdinand A. and Mensah, Yaw M., Managerial Entrenchment and Value-Relevance of Earnings During the Pre- and Post- Sarbanes Oxley Periods (September 2007). Available at SSRN: https://ssrn.com/abstract=1012746 or http://dx.doi.org/10.2139/ssrn.1012746

Anthony C. Ng (Contact Author)

Monash University ( email )

Caulfield Campus
900 Dandenong Road
Caulfield East, VIC 3145
Australia
+61 3 990 32027 (Phone)

Ferdinand A. Gul

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

Yaw M. Mensah

Rutgers Business School - Newark & New Brunswick ( email )

100 Rockafeller Road
Piscataway, NJ 08854
United States
848.445.4369 (Phone)
732.445.0351 (Fax)

HOME PAGE: http://business.rutgers.edu

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