Discontinuities in Earnings and Earnings Change Distributions after J-SOX Implementation: Empirical evidence from Japan


Prior research finds that the Sarbanes-Oxley Act (US-SOX) of 2002 has affected earnings management in the United States. Cohen et al. (2008) indicate that accrual-based earnings management has declined since the passage of US-SOX, while real earnings management has increased. Further, Gilliam et al. (2015) show that the zero-earnings discontinuity has disappeared since its passage, indicating that earnings management to avoid losses has decreased as a result. In Japan, the Financial Instruments and Exchange Act of 2006, the so-called Japanese version of SOX (J-SOX), was implemented for fiscal years starting in April 2008. Similar to US-SOX, J-SOX aims to reinforce the corporate governance of financial reporting. This study investigates whether the discontinuity in the distributions of earnings and earnings changes disappeared after J-SOX implementation. In contrast to US-SOX, the results indicate that the discontinuity in the earnings distribution at zero did not disappear after J-SOX implementation. However, the discontinuity in the earnings change distribution at zero almost disappeared after J-SOX implementation, indicating that earnings management to avoid earnings decreases became less prevalent. In addition, the results indicate that the discontinuity in the distribution of earnings changes before J-SOX implementation was mainly caused by habitual beaters and that earnings management by habitual beaters to avoid earnings decreases was less prevalent after J-SOX implementation.


Earnings distribution, Earnings management, Loss avoidance, Earnings decrease avoidance, Sarbanes-oxley act, Financial instruments and exchange act of Japan

JEL Classification

G38, M41, M48


Masahiro ENOMOTO
Research Institute for Economics and Business Administration,
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059

Faculty of Business Administration, Tohoku Gakuin University