The Impact of SOX on Earnings Management Activities around CEO Turnovers

56 Pages Posted: 17 Dec 2018

See all articles by Paul Geertsema

Paul Geertsema

University of Auckland - Department of Accounting and Finance

David H. Lont

University of Otago - Department of Accountancy and Finance

Helen Lu

University of Auckland - Department of Accounting and Finance

Date Written: February 15, 2018

Abstract

We assess the impact of the Sarbanes-Oxley Act (SOX) on discretionary accruals (DA) and real earnings management (REM) activities around CEO turnovers. Improved corporate governance post-SOX can either deter earnings management (the deterrence effect) or pressure CEOs to inflate earnings when facing imminent turnover risks (the pressure effect). We find a strong deterrence effect for new CEOs, while the pressure effect dominates the deterrence effect for outgoing CEOs. Pre-SOX firms with new CEOs manage earnings downward through both DA and REM and the effect is more pronounced in weakly governed firms. Post-SOX both types of earnings baths diminished. By contrast, post-SOX firms engage in more aggressive upward earnings management prior to CEO turnovers and the evidence is stronger prior to performance-induced CEO turnovers. The compulsory compliance with the 2003 NYSE and NASDAQ listing rule on audit committee independence is associated with a reduction in new-CEO REM baths.

Keywords: CEO Turnover, SOX, Real Earnings Management, Discretionary Accruals

JEL Classification: C23, G30, M41

Suggested Citation

Geertsema, Paul G. and Lont, David H. and Lu, Helen, The Impact of SOX on Earnings Management Activities around CEO Turnovers (February 15, 2018). Available at SSRN: https://ssrn.com/abstract=3301800 or http://dx.doi.org/10.2139/ssrn.3301800

Paul G. Geertsema

University of Auckland - Department of Accounting and Finance ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

David H. Lont

University of Otago - Department of Accountancy and Finance ( email )

Box 56
Dunedin, Otago 9054
New Zealand
+64 3 479 8119 (Phone)
+64 3 479 8171 (Fax)

HOME PAGE: http://www.business.otago.ac.nz/acty/

Helen Lu (Contact Author)

University of Auckland - Department of Accounting and Finance ( email )

Private Bag 92019
Auckland 1001
New Zealand

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