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

Patrick Chardonnens, Peter Fiechter and Martin Wallmeier

Finance Research Letters, 2022, vol. 49, issue C

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.

Keywords: Earnings management; Zero-earnings discontinuity; Sarbanes-Oxley Act (SOX); Dotcom boom; Earnings distribution; Loss avoidance (search for similar items in EconPapers)
JEL-codes: G38 M41 M48 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322002719

DOI: 10.1016/j.frl.2022.103033

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