Sarbanes-Oxley Act, insider trading and earnings management

Nting, Rexon Tayong (2009) Sarbanes-Oxley Act, insider trading and earnings management. PhD thesis, University of Glasgow.

Abstract

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.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Keywords: Sarbanes Oxley, Insider Trading, Earnings Management, Firm Performance, Standards and Poors
• Subjects: H Social Sciences > HG Finance; H Social Sciences > H Social Sciences (General); H Social Sciences > HJ Public Finance
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Supervisor's Name: Forbes, Professor William
• Date of Award: 2009
• Depositing User: mr rexon nting
• Unique ID: glathesis:2009-1308
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 17 Nov 2009
• Last Modified: 10 Dec 2012 13:37
• URI: https://theses.gla.ac.uk/id/eprint/1308