The “Numbers Game” in the Pre- and Post-Sarbanes-Oxley Eras

Abstract

We address two research questions in this study. First, is there a change in the prevalence of expectations management to meet or beat analysts' earnings expectations in the aftermath of the 2001–2002 accounting scandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, did the mix among the three mechanisms used for meeting or beating analysts' earnings expectations: accrual-based earnings management, real earnings management, and expectations management change in the Post-SOX period? We hypothesize and provide empirical evidence that the observed drop in the frequency of just meeting or beating analysts' earnings expectations is associated with both (1) a decline in the use of downward expectations management and upward accrual-based earnings management in the Post-SOX period relative to the preceding seven-year period and (2) an increase in upward real earnings management activities.