Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods

44 Pages Posted: 8 Oct 2008

Multiple version iconThere are 2 versions of this paper

Date Written: February 2005

Abstract

We document that firms management of accounting earnings increased steadily from1987 until the passage of the Sarbanes Oxley Act (SOX), with a significant increaseduring the period prior to SOX, followed by a significant decline after passage of SOX.However, the increase in earnings management preceding SOX was primarily in poorlyperforming industries. We also show that the informativeness of earnings increasedsteadily over time, and there was no significant change in earnings informativeness following the passage of SOX. Further, we find that earnings management increased the absolute informativeness of earnings, but reduced the informativeness for a given earnings surprise, as well as reduced the abnormal return for a given amount of earnings surprise. Finally, the evidence supports the hypothesis that the opportunistic behavior of managers, primarily related to the fraction of compensation derived from options, was significantly associated with earnings management in the period preceding SOX.

Suggested Citation

Cohen, Daniel A. and Dey, Aiyesha and Lys, Thomas Z., Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods (February 2005). NYU Working Paper No. DANIEL A. COHEN-01. Available at SSRN: https://ssrn.com/abstract=1280708

Daniel A. Cohen (Contact Author)

Texas A&M University College Station

Department of Accounting
College Station, TX 77843
United States

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)

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