Discussion of "The 'Numbers Game' in the Pre- and Post-Sarbanes-Oxley Eras"

Eli Bartov and Daniel Cohen (2009) test whether there has been a decline in the extent to which managers engage in opportunistic activities to meet or beat analyst benchmarks after the passage of the Sarbanes-Oxley Act (SOX) in response to the well-publicized corporate scandals of 2001 and 2002. They document a decline in the proportion of firms just meeting or beating analyst expectations (JMB firms) in the Post-SOX period. Focusing on the specific strategic actions taken by JMB firms, they find evidence of a shift away from expectations management and earnings management via accruals, towards earnings management via real activities. The research setting is intuitively appealing, and the results documented in the paper are very interesting. However, there appear to be multiple inferences that can be drawn from these results. In particular, the patterns documented in the paper raise questions about whether the effects of regulation (in this case, SOX) are indeed beneficial for capital markets, an issue that is clearly an interesting topic for further examination.