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Mr Zheng

In: Computers and Technology

Submitted By jij00015
Words 10135
Pages 41
Accounting Horizons
Vol. 27, No. 2
2013
pp. 301–318

American Accounting Association
DOI: 10.2308/acch-50434

Capital Structure, Earnings Management, and Sarbanes-Oxley: Evidence from
Canadian and U.S. Firms
Kelly E. Carter
SYNOPSIS: I examine Sarbanes-Oxley’s (SOX) effect on capital structure. I find that
SOX is associated with higher long-term debt ratios, as firms listed in the U.S. raise their long-term debt ratios by 2 to 3 percentage points. This finding is consistent with the idea that, although the reduction in information asymmetry associated with SOX could prompt managers to increase equity financing, debt is still safer and less costly than equity in the
SOX era. Further analysis shows that the increase in debt occurs in the two quarters prior to SOX, suggesting that firms anticipate a higher cost of debt after SOX and acquire debt while it is relatively cheap. Also, firms that heavily (lightly) manage earnings prior to
SOX use less (more) debt after SOX. This result is consistent with the view that firms that aggressively manage earnings before SOX reveal intrinsically weaker earnings after
SOX, casting doubt on those firms’ ability to repay debt and relegating those firms to issue equity for financing purposes.
Keywords: capital structure; earnings management; debt ratio; Sarbanes-Oxley.
JEL Classifications: G32; G38.
Data Availability: Data available upon request.

Kelly E. Carter is an Assistant Professor at Morgan State University.
I particularly thank Terry Shevlin (co-editor) and an anonymous referee for their detailed, excellent comments, which greatly improved this paper. I also thank Alexander Butler, Laura Field, Delroy Hunter, Ninon Kohers Sutton, Patrick J. Kelly, and
Jianping Qi for their valuable feedback. In addition, I thank Scott Besley, Matthew Billett, Jonathan Clarke, George Comer,
Shane Johnson, Norris...

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