Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management

36 Pages Posted: 5 Dec 2003

See all articles by Haidan Li

Haidan Li

Santa Clara University - Leavey School of Business

Morton Pincus

University of California, Irvine

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: September 24, 2006

Abstract

The Sarbanes-Oxley Act of 2002 (SOX) is the most important legislation affecting corporate financial reporting enacted in the United States since the 1930s. Its purpose is to improve the accuracy and reliability of accounting information reported to investors. We examine stock price reactions to legislative events surrounding SOX, and focus on whether such stock price effects are related cross-sectionally to the extent firms had managed their earnings. Our univariate results indicate significantly positive abnormal stock returns associated with SOX events, and our primary analyses reveal considerable evidence of a positive relation between SOX event stock returns and extent of earnings management. These results are consistent with investors anticipating that SOX would constrain earnings management and enhance the quality of financial statement information more, the more firms had managed their earnings.

Keywords: Sarbanes-Oxley, earnings management, event study

JEL Classification: M41, M43, M49, G34, G14, G18, K22

Suggested Citation

Li, Haidan and Pincus, Morton P.K. and Rego, Sonja O., Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management (September 24, 2006). Available at SSRN: https://ssrn.com/abstract=475163 or http://dx.doi.org/10.2139/ssrn.475163

Haidan Li

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
408-554-5181 (Phone)

Morton P.K. Pincus

University of California, Irvine ( email )

Irvine, CA 92697-3125
United States
949-824-4062 (Phone)
949-725-2812 (Fax)

Sonja O. Rego (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

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