Abstract
We examine changes in discretionary accruals following the Sarbanes-Oxley Act (SOX). SOX imposes considerably greater potential penalties on CEO/CFOs; therefore, risk averse managers are likely to be more conservative in their financial reporting and report lower discretionary accruals following SOX. We find that Canadian firms that are listed on both Canadian and US exchanges and are subject to SOX report lower discretionary accruals following SOX than they did in the period immediately preceding SOX. To increase the validity of our findings, we perform a similar comparison on a matched sample of Canadian firms that are listed only on Canadian exchanges. Our results indicate that (1) Canadian firms subject to SOX report lower discretionary accruals and incorporate losses more quickly than gains in the period after SOX; (2) there is no regulatory spillover effect of SOX on Canadian firms not under the jurisdiction of SOX; (3) the impact of SOX on firms' conservative reporting through discretionary accruals is not homogeneous; it is more pronounced for firms that were aggressive in the pre-SOX period.
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