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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.
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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 

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