Did Accrual Earnings Management Decline and Real Earnings Management Increase Post-SOX? A Re-examination and Replication

A widely cited paper, Cohen, Dey, and Lys (2008, hereinafter CDL), examines accrual (AEM) and real earnings management (REM) pre- and post-Sarbanes Oxley and provides evidence that, in the period immediately following SOX, accruals management declined and was substituted by REM. We re-visit CDL and ask whether CDL’s main results extend to recent periods. We find AEM declines in the period immediately after SOX, but the results are sensitive to some research design choices. We also find AEM continues to decline in recent years, suggesting that the components of SOX were largely successful in constraining AEM. We also find REM and AEM behave as substitutes in the period preceding SOX, but contrary to CDL, we show the substitution effect significantly weakens post-SOX. Finally, we are unable to replicate CDL’s samples and some of their results