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Discontinuities in Earnings and Earnings Change Distributions after J-SOX Implementation: Empirical evidence from Japan

Author

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  • Masahiro Enomoto

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

  • Tomoyasu Yamaguchi

    (Faculty of Business Administration, Tohoku Gakuin University)

Abstract

Prior research finds that the Sarbanes-Oxley Act (US-SOX) of 2002 has affected earnings management in the United States. Cohen et al. (2008) indicate that accrual-based earnings management has declined since the passage of US-SOX, while real earnings management has increased. Further, Gilliam et al. (2015) show that the zero-earnings discontinuity has disappeared since its passage, indicating that earnings management to avoid losses has decreased as a result. In Japan, the Financial Instruments and Exchange Act of 2006, the so-called Japanese version of SOX (J-SOX), was implemented for fiscal years starting in April 2008. Similar to US-SOX, J-SOX aims to reinforce the corporate governance of financial reporting. This study investigates whether the discontinuity in the distributions of earnings and earnings changes disappeared after J-SOX implementation. In contrast to US-SOX, the results indicate that the discontinuity in the earnings distribution at zero did not disappear after J-SOX implementation. However, the discontinuity in the earnings change distribution at zero almost disappeared after J-SOX implementation, indicating that earnings management to avoid earnings decreases became less prevalent. In addition, the results indicate that the discontinuity in the distribution of earnings changes before J-SOX implementation was mainly caused by habitual beaters and that earnings management by habitual beaters to avoid earnings decreases was less prevalent after J-SOX implementation.

Suggested Citation

  • 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.
    • Handle: RePEc:kob:dpaper:dp2015-26
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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2015-26.pdf
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    References listed on IDEAS

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    Cited by:

    1. Trimble, Madeline, 2018. "A reinvestigation into accounting quality following global IFRS adoption: Evidence via earnings distributions," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 33(C), pages 18-39.
    2. Masahiro Enomoto & Tomoyasu Yamaguchi, 2016. "The Impact of Japanese Regulatory Changes on Accrual-Based and Real Earnings Management," Discussion Paper Series DP2016-18, Research Institute for Economics & Business Administration, Kobe University.
    3. Ishida, Souhei & Kochiyama, Takuma, 2020. "ISS’s Proxy Voting Guidelines and ROE Management," Working Paper Series 235, Management Innovation Research Center, School of Business Administration, Hitotsubashi University Business School.

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    More about this item

    Keywords

    Earnings distribution; Earnings management; Loss avoidance; Earnings decrease avoidance; Sarbanes-oxley act; Financial instruments and exchange act of Japan;
    All these keywords.

    JEL classification:

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

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