Sarbanes-Oxley Act, insider trading and earnings management

The empirical motivation of this dissertation is the increasing importance of financial market’s regulation pursuant of the Sarbanes Oxley Act of 2002 (SOX). There is currently incomplete knowledge on the relationship between insider trading and earnings management on the one hand and earnings management and firm performance on the other in light of the recent regulatory intervention (SOX). Moreover, the relevance of political regulation of financial markets has not yet been thoroughly investigated. The research aims of the dissertation are: 1) To evaluate the effectiveness of financial market regulation (SOX) on Insider trading and Earnings management 2) To empirically examine how the different techniques used to manage earnings influence firm performance in light of the recent regulatory intervention (SOX). Both tests suggest ways in which investors can examine and unravel a comprehensive set of earnings management signals and their impact on either insider trading or future firm performance. The thesis is divided into two main empirical chapters: The first main empirical chapter (chapter 4) discusses insider trading and earnings management in light of the recent regulatory intervention mandated by the SOX. The second main empirical chapter (Chapter 5) discuss changes in earnings management and firm performance relationship in light of the recent regulatory intervention as prescribed by SOX. In an attempt to obtain a comprehensive understanding of several conceptual issues, the different techniques used to manage earnings are employed including, discretionary accruals techniques, real earnings management and the probability of financial statements distortion as measured by the Beneish M-Score. Overall, the focus is on managers of S&P 500 companies, holders of private information about the firm’s prospects, preparers and senders of financial reports and investors and analysts as receivers and users of these financial statements. Findings on the relationship between insider trading and earnings management in light of the recent regulatory intervention suggest that after the Sarbanes Oxley Act of 2002, managers are less likely to time their trade and boast earnings to benefit at the expense of outside investors. Furthermore, under stricter regulations, market participants detect and react to insider trading and earnings management practices. Findings on the relationship between a comprehensive set of earnings management signals and firm performance suggest that there have been greater monitoring of financial III statements in the Post SOX era. When firms attempt to manage earnings during periods of intense market regulation, investors discount this through disappointing stock returns. Overall, the results suggest that there should be broad based approach in analysing financial statements.

Level dc:type.qualificationlevel

PhD

Grantor dc:publisher.institution

University of Glasgow

Year dc:date.issued

2009

Author dc:creator

• Nting, Rexon Tayong

• HG Finance
• H Social Sciences (General)
• HJ Public Finance

Language dc:language

en