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    The Spillover of SOX on Earnings Quality in Non-U.S....
    research summary posted March 22, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 14.0 Corporate Matters, 14.01 Earnings Management 
    The Spillover of SOX on Earnings Quality in Non-U.S. Jurisdictions.
    Practical Implications:

    The costs and benefits of SOX have been researched by numerous authors, however the benefits outside of the United States have generally been limited to those of firms that are listed on U.S. exchanges. The authors observe improvements in earnings quality for subsidiaries of U.S. firms which file financial reports in Belgium, suggesting that there is a spillover effect of SOX compliance outside of domestic firms. The authors caveat that they cannot determine if the results are driven by improved internal controls or improved audit quality of the parent company, but they show improvement in foreign-filing earnings in spite of these financial reports being generated outside of the U.S. reporting process.


    Dutillieux, W., J.R. Francis, M. Willekens. 2016. The Spillover of SOX on Earnings Quality in Non-U.S. Jurisdictions. Accounting Horizons 30 (1): 23-39.

    Earnings quality, U.S. foreign subsidiaries, Sarbanes-Oxley
    Purpose of the Study:

    The authors use Belgian subsidiaries of Belgian companies and U.S. companies around the implementation of SOX to determine if SOX compliance effects performance outside of the United States. While other research has looked at the effect of SOX on foreign firms trading on U.S. exchanges, this study looks into the quality of financial reporting of foreign subsidiaries in their own country, which would be a second-order effect of SOX compliance.

    Design/Method/ Approach:

    The analyses in this paper utilize a sample of Belgian subsidiaries owned by U.S.-based and Belgian-based firms from 1999 to 2005, excluding 2002 (the year of implementation) for a clean separation of pre- and post-SOX windows. The sample of over 2,000 subsidiaries is used to observe the change of earnings quality measures from pre-SOX to post-SOX, and how that changes differs between U.S.-owned subsidiaries and Belgian-owned subsidiaries.


    The authors look at earnings quality for subsidiaries which file financial reports outside of the U.S. which are still obligated to comply with SOX regulations. They find that SOX has a spillover effect on these firms specifically in that they report higher quality earnings relative to a control group of subsidiaries from the same country which do not have to comply with SOX. The U.S.-owned subsidiaries report smaller abnormal accruals and recognize losses more timely, whereas the Belgian-owned subsidiaries had no improvement or even a decline in some instances.

    Corporate Matters, Standard Setting
    Earnings Management, Impact of SOX