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  • May 2008
  • Article
  • Accounting Review

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

By: Daniel Cohen, Aiyesha Dey and Thomas Lys
  • Format:Print
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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 document 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. In addition, our analysis provides evidence that the increases in accrual‐based earnings management in the period preceding SOX were concurrent with increases in equity‐based compensation. Our results suggest that stock‐option components provide a differential set of incentives with regard to accrual‐based earnings management. We document that while new options granted during the current period are negatively associated with income‐increasing accrual‐based earnings management, unexercised options are positively associated with income‐increasing accrual‐based earnings management.

Keywords

Earnings Management; Governing Rules, Regulations, and Reforms; Outcome or Result

Citation

Cohen, Daniel, Aiyesha Dey, and Thomas Lys. "Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods." Accounting Review 83, no. 3 (May 2008): 757–787.
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About The Author

Aiyesha Dey

Accounting and Management
→More Publications

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  • Bear to Bull? An Analyst’s Journey with Netflix By: Aiyesha Dey and Joseph Pacelli
  • Ginkgo Bioworks vs. Scorpion Capital: The Debate Over Related-Party Revenues By: Jonas Heese, Aiyesha Dey and Suraj Srinivasan
  • Understanding The Value of DEI Programs: Perspectives from Corporate Leadership By: Aiyesha Dey, Kristina M. Rennekamp and Joseph Pacelli
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