Does Sarbanes-Oxley Act Affect Earnings Quality?

[[abstract]]The Enron-type scandals lead to the passage of the Sarbanes-Oxley Act (SOX) in July 2002. SOX aims to improve the accuracy and reliability of corporate disclosure. In this paper, we investigate whether the scandals are related to the breakdown of the reliability of financial reporting and examine whether the quality of corporate disclosure improves after the passage of SOX. We use earnings persistence to detect whether there is a widespread loss in earnings quality before SOX and a recovery after SOX. We show that the persistence of earnings components (cash flows and accruals) experience widespread loss in the years before the passage of SOX and that the passage of SOX indeed improves the persistence of the earnings components. We recommend that regulations even costly are required to improve corporate governance and to prevent accounting fraud