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The disappearance of the zero-earnings discontinuity: SOX, dotcom boom or gradual decline?

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  • Chardonnens, Patrick
  • Fiechter, Peter
  • Wallmeier, Martin

Abstract

The zero-earnings discontinuity in the US disappeared around the time when the Sarbanes–Oxley Act (SOX) became effective, suggesting that SOX may have reduced the small loss avoidance by firms. In this paper, we examine a potential confounding effect arising from the dotcom boom at the turn of the millennium. Many newly listed dotcom firms had no revenues but high market capitalizations. Therefore, they mechanically fell into the smallest loss interval, artificially reducing the zero-earnings discontinuity. Once this dotcom effect is accounted for, our results no longer suggest a sharp (causal) effect of SOX on the decline in the zero-earnings discontinuity.

Suggested Citation

  • Chardonnens, Patrick & Fiechter, Peter & Wallmeier, Martin, 2022. "The disappearance of the zero-earnings discontinuity: SOX, dotcom boom or gradual decline?," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322002719
    DOI: 10.1016/j.frl.2022.103033
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    More about this item

    Keywords

    Earnings management; Zero-earnings discontinuity; Sarbanes-Oxley Act (SOX); Dotcom boom; Earnings distribution; Loss avoidance;
    All these keywords.

    JEL classification:

    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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