Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods

52 Pages Posted: 28 Sep 2005

Multiple version iconThere are 3 versions of this paper

Date Written: June 2007

Abstract

We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also find evidence that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. Finally, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in the fraction of equity based compensation.

Keywords: Earnings Management, Sarbanse-Oxley Act, Executive Compensation

JEL Classification: M41, M43, J33, G34, G38

Suggested Citation

Cohen, Daniel A. and Dey, Aiyesha and Lys, Thomas Z., Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods (June 2007). AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=813088 or http://dx.doi.org/10.2139/ssrn.813088

Daniel A. Cohen

Texas A&M University College Station

Department of Accounting
College Station, TX 77843
United States

Aiyesha Dey

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Thomas Z. Lys (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)

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