The Impact of Corporate Governance on Discretionary Accrual Changes Around the Sarbanes-Oxley Act*

35 Pages Posted: 11 Sep 2007

See all articles by Wei Zhang

Wei Zhang

SUNY at Albany

Jian Zhou

University of Hawaii at Manoa

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: August 2006

Abstract

Previous research such as Cohen, Dey and Lys (2005) and Lobo and Zhou (2006) document that there is a decrease in discretionary accruals following the Sarbanes-Oxley Act (hereafter SOX). More specifically, Cohen et al. (2005) document that firms' management of accounting earnings increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, with a significant increase in the two years before SOX when major scandals occurred, and a significant decline after passage of SOX. Lobo and Zhou (2006) find that firms report lower discretionary accruals after SOX than in the period preceding SOX and firms incorporate losses more quickly into their earnings in the post-SOX period. In this paper we posit that corporate governance plays an important role in the behavior of discretionary accruals. We present evidence that firms with stronger corporate governance engage in less earnings management in the post-SOX period. More importantly, firms with stronger governance experience a lower reduction in discretionary accruals in the post-SOX period. This study provides further evidence of the impact of corporate governance on managers' discretionary accounting decisions. More importantly this study shows that the decrease in discretionary accruals behavior in the post-SOX period is not homogeneous across sample firms; it is inversely related to the quality of corporate governance.

Keywords: Sarbanes Oxley Act , Corporate Governance, Earnings Management

JEL Classification: M41, G30, K22

Suggested Citation

Zhang, Wei and Zhou, Jian and Lobo, Gerald J., The Impact of Corporate Governance on Discretionary Accrual Changes Around the Sarbanes-Oxley Act* (August 2006). Available at SSRN: https://ssrn.com/abstract=1011844 or http://dx.doi.org/10.2139/ssrn.1011844

Wei Zhang (Contact Author)

SUNY at Albany ( email )

School of Business
Department of Accounting and Law
Albany, NY 12222
United States

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo