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

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  • Kalelkar, Rachana
  • Nwaeze, Emeka T.

Abstract

In this paper we study the impact of the Sarbanes-Oxley Act (SOX) on the valuation weights of earnings and earnings components. The analysis seeks evidence that SOX is associated with changes in investors' perception of earnings and accruals quality. Of particular interest in the analysis is the effect of SOX on the valuation weight of discretionary accruals that are perceived to be most vulnerable to manipulation prior to SOX. We find reliable increases in the valuation weights of earnings and earnings components after the passage of SOX. Nonetheless, we also find that the post-SOX shifts in the valuation weights of earnings and earnings components are indistinguishable from zero among firms in which the percentage equity shares held by institutional investors is 15% or greater.

Suggested Citation

  • Kalelkar, Rachana & Nwaeze, Emeka T., 2011. "Sarbanes-Oxley Act and the quality of earnings and accruals: Market-based evidence," Journal of Accounting and Public Policy, Elsevier, vol. 30(3), pages 275-294, May.
    • Handle: RePEc:eee:jappol:v:30:y:2011:i:3:p:275-294
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    Cited by:

    1. Charles E. Jordan & Stanley J. Clark & Marilyn A. Waldron, 2014. "Cosmetic Earnings Management before and after Corporate Governance Legislation in Canada," Accounting and Finance Research, Sciedu Press, vol. 3(4), pages 105-105, August.
    2. Masahiro Enomoto & Tomoyasu Yamaguchi, 2015. "Discontinuities in Earnings and Earnings Change Distributions after J-SOX Implementation: Empirical evidence from Japan," Discussion Paper Series DP2015-26, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2016.
    3. Zhijun Lin & Ming Liu & Carlos Noronha, 2016. "The Impact of Corporate Governance on Informative Earnings Management in the Chinese Market," Abacus, Accounting Foundation, University of Sydney, vol. 52(3), pages 568-609, September.
    4. Jingyu Yang & Hai Wu & Yangxin Yu, 2021. "Distracted institutional investors and audit risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 3855-3881, September.
    5. Waters, James, 2013. "The Sarbanes-Oxley Act, industrial innovation, and real option creation," MPRA Paper 49173, University Library of Munich, Germany.
    6. Lucie Courteau & Jennifer L. Kao & Yao Tian, 2015. "Does Accrual Management Impair the Performance of Earnings-Based Valuation Models?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 101-137, January.
    7. repec:hal:journl:dumas-00934329 is not listed on IDEAS
    8. Ching-Lung Chen & Chung-Yu Chen, 2018. "Do Weak Internal Controls Affect Institutional Ownership Decisions?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(03), pages 1-37, September.
    9. Moehrle, Stephen R. & Mintchik, Natalia & Mohrman, Mary Beth & Reynolds-Moehrle, Jennifer A. & Vargus, Mark, 2014. "Developments in accounting regulation: A synthesis and annotated bibliography of evidence and commentary in the 2011 academic literature," Research in Accounting Regulation, Elsevier, vol. 26(2), pages 175-195.
    10. Lo, May H. & Xu, Le (Emily), 2013. "Regulation FD and analysts’ vs. investors’ weightings of the cash components of earnings," Research in Accounting Regulation, Elsevier, vol. 25(2), pages 169-184.
    11. Tauringana, Venancio & Chithambo, Lyton, 2015. "The effect of DEFRA guidance on greenhouse gas disclosure," The British Accounting Review, Elsevier, vol. 47(4), pages 425-444.
    12. Nikos Vafeas & Adamos Vlittis, 2024. "Earnings quality and board meeting frequency," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1037-1067, April.

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