Prof's Work Has Special Relevance in Market Debate
Widely Cited Paper Examines Financial Records Before and After Sarbanes-Oxley
Feb. 7, 2011
Few topics of economic research could be timelier than studying the effects of regulation on capital markets. Dr. Daniel Cohen brought research expertise in the subject with him last fall when he joined the School of Management faculty as an associate professor in accounting.
In researching the economic consequences of recent regulation of financial markets, Cohen focuses on whether corporate governance regulation – such as the Sarbanes-Oxley Act (SOX), powerful legislation that reformed business practices – is effectively curbing management’s behavior and financial reporting practices. Although SOX proposed sweeping changes, the scope of the events that led to the passage of the act and the consequences of the resulting regulatory changes had not been studied before, Cohen said.
“It was unclear at the time we conducted our research project whether there really was a widespread breakdown of the reliability of financial reporting prior to the passage of SOX or whether the highly publicized accounting scandals were isolated instances of individuals engaging in blatant financial manipulations,” Cohen said. “And if it were the former, how did the passage of SOX affect firms’ financial reporting practices? Some argue that these accounting frauds occurred after 70 years of ever-increasing securities regulation, suggesting that more regulation may not be the answer.”
Cohen and his two co-authors examined the prevalence of various types of earnings management strategies focusing on those that are easier to engage in and harder to detect and scrutinize. They started by investigating the prevalence of different types of earnings management activities in the period leading and the period following the passage of SOX.
Following the passage of SOX, they found that earnings management activities using accruals adjustments – which are easier to be challenged by auditors – declined significantly, while earnings management activities involving real activities, such as increasing production costs and cutting discretionary expenses and R&D investments, increased significantly. They also found a strong relationship between the percentage of compensation from stock options and the amount of earnings management activities.
Cohen’s research, “Real and Accrual-Based Earnings Management in the Pre- and Post- Sarbanes-Oxley Periods” was published in The Accounting Review in 2008 and has been widely cited by academics, practitioners and politicians.
Cohen’s research has been recognized in the U.S. and abroad, and he has received numerous invitations from leading accounting departments at such universities as the University of Chicago, Columbia University, the University of Michigan, MIT and Stanford University to present his work.
Cohen, who is currently an associate editor at the Journal of Accounting and Economics, previously served on the faculties at the Stern School of Business at New York University and the Wharton School of Business at the University of Pennsylvania. He received his Ph.D. in accounting from the Kellogg School of Management at Northwestern University and his MBA and BA from the Hebrew University of Jerusalem.