The Disappearance of the Zero-Earnings Discontinuity: SOX, Dotcom Boom or Gradual Decline?

15 Pages Posted: 12 Jul 2021 Last revised: 20 Jun 2022

See all articles by Patrick Chardonnens

Patrick Chardonnens

University of Fribourg - University of Fribourg - Faculty of Economics and Social Science; ZHAW School of Management and Law

Peter Fiechter

University of Neuchatel - Institute of Financial Analysis

Martin Wallmeier

University of Fribourg - Faculty of Economics and Social Science

Date Written: May 2022

Abstract

The zero-earnings discontinuity in the US disappeared around the time when the Sarbanes–Oxley Act (SOX) became effective, suggesting that SOX may have reduced the small loss avoidance by firms. In this paper, we examine a potential confounding effect arising from the dotcom boom at the turn of the millennium. Many newly listed dotcom firms had no revenues but high market capitalizations. Therefore, they mechanically fell into the smallest loss interval, artificially reducing the zero-earnings discontinuity. Once this dotcom effect is accounted for, our results no longer suggest a sharp (causal) effect of SOX on the decline in the zero-earnings discontinuity.

Keywords: Earnings management, Zero-earnings discontinuity, SOX, Dotcom boom, Earnings distribution, Small loss avoidance

JEL Classification: M48, G38, M41

Suggested Citation

Chardonnens, Patrick and Fiechter, Peter and Wallmeier, Martin, The Disappearance of the Zero-Earnings Discontinuity: SOX, Dotcom Boom or Gradual Decline? (May 2022). Finance Research Letters, 2022, Available at SSRN: https://ssrn.com/abstract=3882896 or http://dx.doi.org/10.2139/ssrn.3882896

Patrick Chardonnens

University of Fribourg - University of Fribourg - Faculty of Economics and Social Science ( email )

Switzerland

ZHAW School of Management and Law ( email )

St.-Georgen-Platz 2
Winterthur, 8401
Switzerland

Peter Fiechter

University of Neuchatel - Institute of Financial Analysis ( email )

Rue A.-L. Breguet 2
Neuchatel, CH-2000
Switzerland

Martin Wallmeier (Contact Author)

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland
+41 26 300 8294 (Phone)

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