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

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.1

The Effects of Corporate Social Responsibility on Real and Accrual‐based Earnings Management: Evidence from China

“…Kuo et al (2014) find that Chinese firms are more likely to prefer REM over AEM after the split share structure reform (SSSREF) that introduced more market forces, thereby increasing visibility to outside stakeholders. This finding is consistent with Cohen et al (2008) and Ewert and Wagenhofer (2005), but contrary to Bozzolan et al (2015). Thus, we set out the second hypotheses as follows:…”

“…It is interesting to note that while state-controlled firms are less likely to engage in REM in general, when they engage in more CSR activities, they tend to manipulate their earnings more frequently, supporting managerial opportunism perspectives in state-controlled firms. Furthermore, they prefer REM over AEM as CSR practices increase, which is somewhat consistent with Cohen et al (2008), Ewert and Wagenhofer (2005) and Kuo et al (2014), but contrary to Bozzolan et al's (2015) findings. Therefore, Hypothesis 2a is rejected, but Hypothesis 2b is accepted.…”

“…Meanwhile, Bozzolan et al (2015) find that enhanced CSR is likely to discourage REM but encourage AEM since REM undermines firms' long-term value. But, according to Cohen et al (2008) and Ewert and Wagenhofer (2005), there is a possibility that enhanced CSR may discourage AEM but encourage REM because the probability of being detected in using AEM will increase as Chinese firms provide more operational information in their CSR disclosure. This reasoning is contrary to the findings of Bozzolan et al (2015).…”

Does XBRL Adoption Constrain Earnings Management? Early Evidence from Mandated U.S. Filers

“…2 External users of financial statements are, therefore, in a better position to decipher managerial reporting opportunism in general and to uncover abnormal accrual choices in particular. As a result, managers are likely to face more effective monitoring and scrutiny, which should in turn reduce their ability to manage earnings (e.g., Bushman and Smith 2001;Jo and Kim 2007;Cohen et al 2008;Huang and Zhang 2012). In the post-XBRL period, we therefore expect less earnings management via discretionary accrual choices.…”

Earnings Quality in a Bubble Period: The Case of Construction Activity Firms in Spain

“…However, 'real actions' have not received as much attention as accruals management. In this paper, we consider these practices by studying (1) abnormal levels of CFO, (2) abnormal levels of production costs, and (3) abnormal levels of discretionary expenses (Dechow et al 1998;Roychowdhury 2006;Cohen et al 2008). The following equations are estimated for each activity sector and year, to obtain the abnormal CFO, production costs and discretionary expenses as the residual values (R CFO;R PROCOST; R DEXPE).…”