The Mitigation of High-Growth-Related Accounting Distortions after Sarbanes-Oxley

This study examines the effect of the Sarbanes-Oxley Act of 2002 (SOX) on accounting distortions in the context of the earnings quality of high-growth firms relative to lower-growth firms. High-growth creates unique management and reporting challenges that can contribute to accounting-related distortions. SOX, with its emphasis on financial reporting, control systems, and management responsibility could have been particularly relevant for high-growth firms with such challenges. Test results indicate a stronger reduction (weaker increase) in accounting distortions related to total accruals and book-tax differences (performance-matched modified Jones discretionary accruals) for high-growth firms from the pre- to the post-SOX period relative to lower-growth firms. Other tests indicate that the relation between accounting returns and market returns strengthened for high-growth firms in the period after SOX, but not for lower-growth firms. These results suggest greater reductions in accounting distortions and related improvements in reporting quality for high-growth firms relative to other firms coinciding with the post-SOX period