Abstract
We examine whether firms engage in less income-increasing earnings management following the Sarbanes-Oxley Act and the resulting requirement by the SEC that financial statements be certified by firms' CEOs and CFOs. Unlike other research on this topic that examines US firms, we focus on Canadian firms that are listed on both Canadian and US exchanges. Because these firms are listed on US exchanges, their CEO/CFOs have to certify their financial statements in accordance with the SEC's rule. We find that earnings management in the certification year is significantly lower than in the pre-certification year for these dual-listed firms. We perform a similar comparison for a sample of Canadian firms that are listed only on Canadian exchanges. These firms are not subject to the SEC's certification requirement; therefore, their incentives to manage earnings upwards have not changed from the pre-certification to the certification year. Consequently, they serve as a natural control sample for our tests. Our empirical evidence is consistent with this prediction. We find no significant difference in earnings management in the certification and pre-certification years for these firms. Our findings suggest that the Sarbanes-Oxley Act and the resulting SEC requirement that CEO/CFOs certify their financial statements enhanced the quality of reported earnings by reducing the extent of income-increasing earnings management.
Published Version
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