Pricing and Persistence of Discretionary Accruals in the Post-SOX Era: U.S. Evidence

Abstract

This study focuses on two related research questions. First, using Sloan's (1996) model, we investigate the effect of the Sarbanes-Oxley Act (SOX) on the persistence of accruals. Specifically, we examine whether SOX has improved the persistence of accruals. Second, we assess the impact of SOX on the pricing of discretionary accruals, investigating whether the overpricing of discretionary accruals has decreased in the post-SOX period. The post-SOX accounting literature suggests that SOX acts as a deterrent to accrual management. An increased deterrent to accrual management is likely to improve the persistence of accruals and should also reduce the overpricing of discretionary accruals. Consistent with our expectations, we find that SOX has improved the persistence of accruals and has decreased the overpricing of discretionary accruals. Our findings suggest a key benefit of SOX, its role in improving persistence of accrual and reducing the mispricing of discretionary accruals, thereby enhancing both financial reporting reliability and market efficiency. These results have important implications for regulators, standard setters, auditors, audit committees and financial statement users by offering evidence that SOX delivers meaningful benefits that may offset its widely debated costs.

Keywords: Pricing of Accruals, Persistence of Accruals, Sarbanes-Oxley Act, Discretionary Accruals, Accruals

JEL Classification: M40, M41, M42, K22