Study: Sarbox Made Analyst Earnings Projections Less Accurate

Lora Bentley

It's true that Sarbanes-Oxley has made public company financial filings more reliable -- at least to some extent. But a new study from three accounting professors has found that it also seems to make financial analysts "less able to forecast corporate earnings," according to The New York Times.


The study, "The Impact of the Sarbanes-Oxley Act on Information Quality in Capital Markets" (working paper version here), focused on the accuracy of analysts' earnings projections, the story says:

[If] Sarbanes-Oxley had led to more and better information being available, the average analyst's earnings forecast should have become more accurate after the law took effect. In addition, there should also be less variation among individual analysts' forecasts.

Though forecasts were more accurate for the first year after the law was enacted, in the second and third years after Sarbox, they were less accurate than forecasts had been before the law was passed. According to study co-author Joy Begley, an associate professor from the University of British Columbia in Vancouver, it's highly likely that Sarbox played a role in the change. Because there were other changes in the industry (such as Regulation FD) during the study period, however, there's no way to determine just how prominent the law's role was.


The story summarizes how Begley and co-authors, University of British Columbia in Vancouver assistant professor Qiang Cheng and University of Alberta at Edmonton assistant professor Yanmin Gao, structured their study:

The professors began their investigation by gathering data on all publicly traded companies in the United States that are followed by at least two Wall Street analysts. They focused on analysts' earnings forecasts for these companies over a four-year period starting in August 2001, one year before the legislation's enactment. All told, the professors studied 1,807 companies over those four years.

The results don't necessarily mean that Sarbox failed to achieve its goal, Begley told the New York Times. Still, the parade of unintended consequences seems to be never-ending.

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