Sarbanes–Oxley Act and the quality of earnings and accruals: Market-based evidence

Kalelkar, Rachana; Nwaeze, Emeka T.

doi:10.1016/j.jaccpubpol.2011.02.004

Cited by 32 publications

(21 citation statements)

References 44 publications

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“…Therefore, it remains an empirical question whether accounting conservatism is significantly different between fraud and non-firms even after controlling for the SOX Act. Still, Kalelkar and Nwaeze (2011) show that the post-SOX period has implications for higher quality financial reporting as evidenced by an increase in the valuation weights of earnings and earnings components. However, any increase in perceived quality generated by SOX appears to be driven by less sophisticated investors.…”

Section: Expectations Developmentmentioning

confidence: 96%

Conservatism, SEC investigation, and fraud

Alam

Petruska

2012

Journal of Accounting and Public Policy

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Section: Expectations Developmentmentioning

confidence: 96%

Conservatism, SEC investigation, and fraud

Alam

Petruska

2012

Journal of Accounting and Public Policy

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“…Chambers and Payne () focus on accrual persistence and conclude that it increases significantly in the post‐SOX period. Finally, Kalelkar and Nwaeze () analyze valuation weights attached to earnings and earnings components surrounding SOX and identify a reliable increase in all valuation weights after the passage of SOX.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Does Accrual Management Impair the Performance of Earnings‐Based Valuation Models?

Courteau¹,

Kao²,

Tian

2015

Business Fin & Account

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This study examines how accrual manipulations affect firm valuation in the years surrounding the passage of the Sarbanes-Oxley Act (SOX). We compare the absolute percentage pricing errors of RIM and DCF valuation models for a group of US firms suspected to have engaged in accrual manipulations to avoid a small loss or a small earningsdecline vs. "Normal" firms matched on industry, year and size.We find that RIM can better estimate intrinsic value than DCF for the matched Normal firms in the pre-SOX period, but not so for accrual manipulators, and that SOX mitigates the harmful effect of accrual manipulations, completely eliminating the difference in RIM"s accuracy advantage over DCF between Normal firms and accrual manipulators. As a further analysis, we redefine Suspect firms as real-activity manipulators and find a significant across-group difference in accuracy wedge in both sample periods, implying that SOX has prompted firms to favour real-activity manipulations over accrual manipulations. JEL Classification: M41

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“…Iliev, 2010 finds that SOX imposes huge costs on firms but also reports material declines in total accruals and in discretionary accruals following SOX. Kalelkar and Nwaeze, 2011 investigate the extent to which the passage of SOX is associated with more or less investor confidence in earnings and earnings components, with a particular focus on discretionary accruals (which is the component of earnings alleged to be most vulnerable to manipulation). Overall, their results show increases in the valuation weights of earnings and earnings components subsequent to the passage of SOX, which are primarily driven by the pricing actions of unsophisticated investors.…”

Section: Earnings and Regulatory Changesmentioning

confidence: 99%

The Effect of Regulation on the Relationship between Earnings and Stock Returns

Chichernea

Franz²

2016

AFR

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We document that disclosure and analyst regulatory changes made between 2000 and 2003 significantly diminished the magnitude of the relationship between earnings and market returns. While we observe no significant change in the relationship between returns and earnings components (i.e. cash-flows and accruals), earnings components' persistence has significantly declined post-regulation. We interpret this as evidence that a decrease in earnings quality impacted the strength of the earnings-returns relation. We find no significant change when using an international sample control group, which strengthens the claim that the weakened earnings-returns relation found for the U.S. firms is due to regulatory changes.

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Sarbanes–Oxley Act and the quality of earnings and accruals: Market-based evidence

Cited by 32 publications

References 44 publications

Conservatism, SEC investigation, and fraud

Conservatism, SEC investigation, and fraud

Does Accrual Management Impair the Performance of Earnings‐Based Valuation Models?

The Effect of Regulation on the Relationship between Earnings and Stock Returns

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