Understanding earnings quality - MIT Sloan School of Management

marginal tax rate for companies with long-term manufacturing contracts, and Calegari (2000)
documents that companies with long-term manufacturing contracts increase their leverage and
decrease discretionary accruals with high book-tax conformity following the TRA. Klassen, Lang,
and Wolfson (1993) provide evidence that suggests that the U.S. tax rate reduction in 1987 results in
geographic income shifting to the U.S. for multinational companies. 68
5.6.4 The Sarbanes Oxley Act of 2002
Studies of SOX assert that it increased the expected costs of earnings management
(especially accounting fraud) and thus managers are likely to engage in less earnings management
after the implementation of SOX. Cohen, Dey, and Lys (2008) document that earnings management
activities using accruals declined following SOX but that real earnings management activities
increased after SOX. Koh, Matsumoto, and Rajgopal (2008) provide evidence that managers switch
from using discretionary accruals to expectation management in order to meet analyst forecasts.
5.6.5 Other
Three papers in our database study other external factors that provide incentives for earnings
management, but that do not fit into the categories defined above. Hall and Stammerjohan (1997)
find that firms in the oil industry that are facing potentially large litigation damage awards choose
income-decreasing non-working capital accruals relative to a control sample. Bowen, DuCharme,
and Shores (1995) find that firms with greater incentives provided by ongoing implicit claims with
third parties including customers, suppliers, employees, and short-term creditors make more income
increasing inventory and depreciation accounting choices. As an example of their proxies for the
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See Shackelford and Shevlin (2001) for a comprehensive review of income shifting by multinationals, particularly
following the TRA.
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