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The Effects of Sarbanes-Oxley on Reporting Profits

Abstract

David Aron Smith

This paper looks at the effects of Sarbanes-Oxley on the practice known as Earnings Management. Using earnings as reported in quarterly corporate filings, I employ a test of discontinuity used by DeGeorge, Patel and Zeckhauser to estimate the discontinuity in reported earnings per share (EPS) following a major accounting reform resulting from Sarbanes-Oxley. I find that the previous discontinuities found in the literature in reported EPS at 0¢ and 1¢ disappear after the accounting reform. Using a standard market model on security prices, I also find that short-term abnormal returns to reporting 1¢ EPS decrease following this reform, which could indicate positive shortterm returns to Earnings Management.