Cosmetic Earnings Management in the Post-SOX Period: An Analysis of Entity Size

Abstract

Cosmetic earnings management (CEM) takes place when income lies just beneath a benchmark (e.g., $2.98 billion) and management modestly enhances earnings to reach the goal (e.g., $3.00 billion). U.S. studies show that CEM occurred prior to SOX but vanished afterward. Research on CEM after SOX, though, largely ignores the relationship between entity size and earnings management. This study tests for CEM post SOX but does so by separating the sample into quintiles based on entity size. While no evidence of CEM appears for the largest 80 percent of the company-years, significant CEM emerges within the quintile containing the smallest entities.