Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods

Posted: 26 Oct 2007

See all articles by Daniel A. Cohen

Daniel A. Cohen

University of Texas at Dallas - Naveen Jindal School of Management

Aiyesha Dey

Harvard Business School

Thomas Z. Lys

Northwestern University - Kellogg School of Management

Multiple version iconThere are 3 versions of this paper

Abstract

We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also document that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. In addition, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in equity-based compensation. Our results suggest that stock-option components provide a differential set of incentives with regards to accrual-based earnings management. We document that while new options granted during the current period are negatively associated with income-increasing accrual-based earnings management, unexercised options are positively associated with income-increasing accrual-based earnings management.

Keywords: Earnings Management, Real Earnings Management, Sarbanes Oxley Act, Executive Compensation

JEL Classification: M41, M43, J33, G34, G38

Suggested Citation

Cohen, Daniel A. and Dey, Aiyesha and Lys, Thomas Z., Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods. Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1024620

Daniel A. Cohen (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-4772 (Phone)
972-883-6811 (Fax)

Aiyesha Dey

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Thomas Z. Lys

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
2,409
PlumX Metrics