Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-15T03:43:47.106Z Has data issue: false hasContentIssue false
  • English
  • Français

The Sarbanes-Oxley Act, Earnings Management, and Post-Buyback Performance of Open-Market Repurchasing Firms

Published online by Cambridge University Press:  27 January 2014

Sheng-Syan Chen  and
Chia-Wei Huang
Sheng-Syan Chen
Affiliation:
fnschen@management.ntu.edu.tw, College of Management, National Taiwan University, No 1, Sec 4, Roosevelt Rd, Taipei, Taiwan;
Chia-Wei Huang
Affiliation:
cwhuang@saturn.yzu.edu.tw, College of Management, Yuan Ze University, No 135, Yuan-Tung Rd, Chung-Li, Taoyuan, Taiwan.
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine how the Sarbanes-Oxley Act (SOX) affects pre-repurchase earnings management and its association with post-repurchase firm performance. Unlike prior pre-SOX studies, our post-SOX results indicate that open-market repurchasers do not engage in pre-buyback downward accrual-based earnings management. Audit committee independence, reforms in corporate governance structures, and changes in executives’ equity holdings prompted by SOX may explain the findings. Post-SOX, the significant negative association between pre-repurchase abnormal accruals and post-repurchase performance disappears, the market reaction to repurchase announcements becomes significantly less favorable, and there is no evidence of any shift away from accrual-based to real earnings management.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 6 , December 2013 , pp. 1847 - 1876
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ali, A., and Kallapur, S.. “Securities Price Consequences of the Private Securities Litigation Reform Act of 1995 and Related Events.” Accounting Review, 76 (2001), 431–460.Google Scholar
Almeida, H.; Campello, M.; and Weisbach, M. S.. “The Cash Flow Sensitivity of Cash.” Journal of Finance, 59 (2004), 1777–1804.CrossRefGoogle Scholar
Arrunada, B. The Economics of Audit Quality: Private Incentives and the Regulation of Audit and Nonaudit Services. Norwell, MA: Kluwer Academic Publishers (1999).Google Scholar
Barton, J., and Simko, P. J.. “The Balance Sheet as an Earnings Management Constraint.” Accounting Review, 77 (2002), 1–27.CrossRefGoogle Scholar
Bartov, E.; Givoly, D.; and Hayn, C.. “The Rewards to Meeting or Beating Earnings Expectations.” Journal of Accounting and Economics, 33 (2002), 173–204.CrossRefGoogle Scholar
Beeler, J. D., and Hunton, J. E.. “Contingent Economic Rents: Insidious Threats to Audit Independence.” Advances in Accounting Behavioral Research, 5 (2002), 21–50.CrossRefGoogle Scholar
Bertrand, M.; Duflo, E.; and Mullainathan, S.. “How Much Should We Trust Differences-in-Differences Estimates?” Quarterly Journal of Economics, 119 (2004), 249–275.Google Scholar
Brickley, J. A.; Coles, J. L.; and Terry, R. L.. “Outside Directors and the Adoption of Poison Pills.” Journal of Financial Economics, 35 (1994), 371–390.Google Scholar
Byrd, J. W., and Hickman, K. A.. “Do Outside Directors Monitor Managers? Evidence from Tender Offer Bids.” Journal of Financial Economics, 32 (1992), 195–221.Google Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Chan, K.; Chan, L. K. C.; Jegadeesh, N.; and Lakonishok, J.. “Earnings Quality and Stock Returns.” Journal of Business, 79 (2006), 1041–1082.Google Scholar
Chan, K.; Ikenberry, D.; and Lee, I.. “Economic Sources of Gain in Stock Repurchases.” Journal of Financial and Quantitative Analysis, 39 (2004), 461–479.CrossRefGoogle Scholar
Chen, J. Z.; Rees, L. L.; and Sivaramakrishnan, K.. “On the Use of Accounting vs. Real Earnings Management to Meet Earnings Expectations: A Market Analysis.” Working Paper, University of Houston (2010).Google Scholar
Chen, S., and Wang, Y.. “Financial Constraints and Share Repurchases.” Journal of Financial Economics, 105 (2012), 311–331.Google Scholar
Chung, R.; Firth, M.; and Kim, J. B.. “Institutional Monitoring and Opportunistic Earnings Management.” Journal of Corporate Finance, 8 (2002), 29–48.CrossRefGoogle Scholar
Cohen, D. A.; Dey, A.; and Lys, T. Z.. “Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes-Oxley Periods.” Accounting Review, 83 (2008), 757–787.Google Scholar
Cohen, D. A., and Zarowin, P.. “Accrual-Based and Real Earnings Management Activities Around Seasoned Equity Offerings.” Journal of Accounting and Economics, 50 (2010), 2–19.Google Scholar
Collins, D. W., and Hribar, P.. “Earnings-Based and Accrual-Based Market Anomalies: One Effect or Two?” Journal of Accounting and Economics, 29 (2000), 101–123.Google Scholar
Comment, R., and Jarrell, G. A.. “The Relative Signaling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases.” Journal of Finance, 46 (1991), 1243–1271.Google Scholar
Core, J., and Guay, W.. “The Use of Equity Grants to Manage Optimal Equity Incentive Levels.” Journal of Accounting and Economics, 28 (1999), 151–184.Google Scholar
Cornett, M. M.; Marcus, A. J.; and Tehranian, H.. “Corporate Governance and Pay-for-Performance: The Impact of Earnings Management.” Journal of Financial Economics, 87 (2008), 357–373.Google Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1058.Google Scholar
Dittmar, A. K. “Why Do Firms Repurchase Stock?” Journal of Business, 73 (2000), 331–355.Google Scholar
Erickson, M., and Wang, S.. “Earnings Management by Acquiring Firms in Stock for Stock Mergers.” Journal of Accounting and Economics, 27 (1999), 149–176.Google Scholar
Fama, E. F. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283–306.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Fazzari, S. M.; Hubbard, G. R.; and Petersen, B. C.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity, 1 (1988), 141–206.Google Scholar
Fracassi, C., and Tate, G.. “External Networking and Internal Firm Governance.” Journal of Finance, 67 (2012), 153–194.Google Scholar
Francis, B.; Hasan, I.; and Li, L.. “Firms’ Real Earnings Management and Subsequent Stock Price Crash Risk.” Working Paper, Rensselaer Polytechnic Institute (2011).Google Scholar
Frankel, R. M.; Johnson, M. F.; and Nelson, K. K.. “The Relation Between Auditors’ Fees for Nonaudit Services and Earnings Quality.” Accounting Review, 77 (2002), 71–105.Google Scholar
Gong, G.; Louis, H.; and Sun, A. X.. “Earnings Management and Firm Performance Following Open-Market Repurchases.” Journal of Finance, 63 (2008), 947–986.CrossRefGoogle Scholar
Grullon, G., and Michaely, R.. “The Information Content of Share Repurchase Programs.” Journal of Finance, 59 (2004), 651–680.CrossRefGoogle Scholar
Gunny, K. A. “The Relation Between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks.” Contemporary Accounting Research, 27 (2010), 855–888.Google Scholar
Hribar, P., and Collins, D. W.. “Errors in Estimating Accruals: Implications for Empirical Research.” Journal of Accounting Research, 40 (2002), 105–134.Google Scholar
Hutton, A. P.; Marcus, A. J.; and Tehranian, H.. “Opaque Financial Reports, R 2, and Crash Risk.” Journal of Financial Economics, 94 (2009), 67–86.Google Scholar
Ikenberry, D.; Lakonishok, J.; and Vermaelen, T.. “Market Underreaction to Open Market Share Repurchases.” Journal of Financial Economics, 39 (1995), 181–208.Google Scholar
Ikenberry, D.; Lakonishok, J.; and Vermaelen, T.. “Stock Repurchases in Canada: Performance and Strategic Trading.” Journal of Finance, 55 (2000), 2373–2397.Google Scholar
Iliev, P. “The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices.” Journalof Finance, 65 (2010), 1163–1196.Google Scholar
Jain, P. K., and Rezaee, Z.. “The Sarbanes-Oxley Act of 2002 and Capital-Market Behavior: Early Evidence.” Contemporary Accounting Research, 23 (2006), 629–654.Google Scholar
Jiang, J.; Petroni, K. R.; and Wang, I. Y.. “CFOs and CEOs: Who Have the Most Influence on Earnings Management?” Journal of Financial Economics, 96 (2010), 513–526.CrossRefGoogle Scholar
Jones, J. J. “Earnings Management During Import Relief Investigations.” Journal of Accounting Research, 29 (1991), 193–228.Google Scholar
Kaplan, S. N., and Zingales, L.. “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?” Quarterly Journal of Economics, 112 (1997), 169–215.Google Scholar
Klein, A. “Audit Committee, Board of Director Characteristics, and Earnings Management.” Journal of Accounting and Economics, 33 (2002), 375–400.Google Scholar
Kothari, S. P.; Leone, A. J.; and Wasley, C. E.. “Performance Matched Discretionary Accrual Measures.” Journal of Accounting and Economics, 39 (2005), 163–197.Google Scholar
Lie, E. “Detecting Abnormal Operating Performance: Revisited.” Financial Management, 30 (2001), 77–91.Google Scholar
Lie, E. “Operating Performance Following Open Market Share Repurchase Announcements.” Journal of Accounting and Economics, 39 (2005), 411–436.Google Scholar
Linck, J. S.; Netter, J. M.; and Yang, T.. “The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors.” Review of Financial Studies, 22 (2009), 3287–3328.Google Scholar
Louis, H. “Earnings Management and the Market Performance of Acquiring Firms.” Journal of Financial Economics, 72 (2004), 121–148.Google Scholar
Louis, H., and White, H.. “Do Managers Intentionally Use Repurchase Tender Offers to Signal Private Information? Evidence from Firm Financial Reporting Behavior.” Journal of Financial Economics, 85 (2007), 205–233.CrossRefGoogle Scholar
Massa, M.; Rehman, Z.; and Vermaelen, T.. “Mimicking Repurchases.” Journal of Financial Economics, 84 (2007), 624–666.Google Scholar
Mitchell, M. L., and Stafford, E.. “Managerial Decisions and Long-Term Stock Price Performance.” Journal of Business, 73 (2000), 287–329.Google Scholar
Paulson, H. “The Key Test of Accurate Financial Reporting is Trust.” Financial Times (May 17, 2007).Google Scholar
Petersen, M. A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.Google Scholar
Peyer, U., and Vermaelen, T.. “The Nature and Persistence of Buyback Anomalies.” Review of Financial Studies, 22 (2009), 1693–1745.Google Scholar
Roychowdhury, S. “Earnings Management Through Real Activities Manipulation.” Journal of Accounting and Economics, 42 (2006), 335–370.Google Scholar
Securities and Exchange Commission (SEC). Final Rule: Revision of the Commission’s Auditor Independence Requirements. Washington, DC: Government Printing Office (2000).Google Scholar
Shivakumar, L. “Do Firms Mislead Investors by Overstating Earnings Before Seasoned Equity Offerings?” Journal of Accounting and Economics, 29 (2000), 339–371.Google Scholar
Sloan, R. G. “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?” Accounting Review, 71 (1996), 289–315.Google Scholar
Vermaelen, T. “Common Stock Repurchases and Market Signaling: An Empirical Study.” Journal of Financial Economics, 9 (1981), 139–183.Google Scholar
Weisbach, M. S. “Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431–460.Google Scholar
Whited, T. M., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.Google Scholar
Xie, B.; Davidson, W. N.; and DaDalt, P. J.. “Earnings Management and Corporate Governance: The Role of the Board and the Audit Committee.” Journal of Corporate Finance, 9 (2003), 295–316.Google Scholar
Xie, H. “The Mispricing of Abnormal Accruals.” Accounting Review, 76 (2001), 357–373.Google Scholar
Yu, F. “Analyst Coverage and Earnings Management.” Journal of Financial Economics, 88 (2008), 245–271.CrossRefGoogle Scholar
Zhang, I. X. “Economic Consequences of the Sarbanes-Oxley Act of 2002.” Journal of Accounting and Economics, 44 (2007), 74–115.CrossRefGoogle Scholar