Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods
44 Pages Posted: 8 Oct 2008
Date Written: February 2005
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.
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