Reexamination of earnings management before and after SOX: Evidence from SEC staff accounting bulletins 99-100

A substantial literature suggests that earnings management improved for U.S. firms in the post-2002 time period as a result of the Sarbanes-Oxley Act (henceforth, SOX) (Coates and Srinivasan, 2014) which was passed in the latter part of 2002. However, few papers have explored the impact of the Security and Exchange Commission’s Staff Accounting Bulletins (SABs) 99-100 in the year 2000 following their passage in late 1999. As a result, some of the reductions in earnings management that prior research attributes to SOX may have been due to these two SABs. We find that in 2000 there was a significant decline in the zero earnings discontinuity in quarterly earnings considered by prior research to be evidence of earnings management to avoid small losses. Surprisingly, we find only mixed evidence that SOX provided an incremental impact to that of the SABs, which occurs mainly in the quarterly distribution of EPS rather than in scaled quarterly earnings. We also find evidence that the passage of the SABs significantly reduced the practice where firms take write-offs in the fourth quarter that turn a profit for the year into a loss. Overall, our findings suggest that the decline in quarterly earnings management started well before SOX due to the SEC’s initiatives.