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Keywords:

Sarbanes-Oxley, earnings quality, subsidiaries, Belgium

Abstract:

Prior U.S. studies report significant earnings quality effects of the Sarbanes-Oxley Act (SOX). In this paper we examine whether this SOX effect is also observed outside the U.S. on earnings quality measures of foreign subsidiaries of U.S. listed firms. We argue that in institutional environments where the incentives to issue high quality financial reporting are weaker than in the U.S., an “export” of SOX improving earnings quality is likely. Belgium is a suitable institutional setting to test this hypothesis, with weak investor protection, trivial auditor and manager litigation and limited regulatory reforms after the public trust crisis. We find that Belgian subsidiaries of U.S. listed parents indeed manage their earnings less and recognize their losses timelier after SOX, whilst the earnings quality of a control group of Belgian subsidiaries of Belgian listed parents deteriorates. These findings suggest that SOX is associated with an improvement of earnings quality of Belgian SOX compliers and that this change is not caused by changes in the Belgian regulatory environment.