The joint influence of Sarbanes‐Oxley and FAS123R on financial misreporting

Prior research reports that a manager's equity risk‐taking incentive (vega) is positively associated with financial misreporting. FAS 123R led to a significant decrease in vega while SOX increased the cost of financial misreporting. Consistent with the original intent of the legislation, we fin...

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Bibliographic Details
Published in:Journal of business finance & accounting 2023-10, Vol.50 (9-10), p.1836-1866
Main Authors: Davis, Robert T., Lopez, Thomas J., Pollard, Troy
Format: Article
Language:English
Subjects:
Fraud
Legislation
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Summary:Prior research reports that a manager's equity risk‐taking incentive (vega) is positively associated with financial misreporting. FAS 123R led to a significant decrease in vega while SOX increased the cost of financial misreporting. Consistent with the original intent of the legislation, we find that SOX contributed to significant decreases in both fraud restatements and AAERs. Importantly, our results suggest that the SOX‐induced decreases in fraud restatements and AAERs have endured to more recent years. On the other hand, while we find evidence that equity‐incentive‐motivated financial misreporting ceased to exist in the immediate years after FAS 123R, we also find that this was only temporary. In particular, we find strong evidence of a significantly positive association between vega and accrual misreporting in more recent years.
ISSN:0306-686X
1468-5957
DOI:10.1111/jbfa.12670