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

Masahiro Enomoto and Tomoyasu Yamaguchi
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Tomoyasu Yamaguchi: Faculty of Business Administration, Tohoku Gakuin University

No DP2015-26, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe 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.

Keywords: Earnings distribution; Earnings management; Loss avoidance; Earnings decrease avoidance; Sarbanes-oxley act; Financial instruments and exchange act of Japan (search for similar items in EconPapers)
JEL-codes: G38 M41 M48 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2015-06, Revised 2016-10
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (3)

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