The disappearance of the zero-earnings discontinuity: SOX, dotcom boom or gradual decline?

Chardonnens, Patrick; Fiechter, Peter; Wallmeier, Martin

doi:10.1016/j.frl.2022.103033

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Journal article

The disappearance of the zero-earnings discontinuity: SOX, dotcom boom or gradual decline?

BP2-STS

Chardonnens, Patrick ORCID University of Fribourg
Fiechter, Peter ORCID Université de Neuchâtel
Wallmeier, Martin ORCID University of Fribourg

2022

Published in:

Finance Research Letters. - Elsevier BV. - 2022, vol. 49, p. 103033

English The zero-earnings discontinuity in the US disappeared around the time when the Sarbanes-Oxley Act (SOX) became effective, suggesting that SOX may have reduced the small loss avoidance by firms. In this paper, we examine a potential confounding effect arising from the dotcom boom at the turn of the millennium. Many newly listed dotcom firms had no revenues but high market capitalizations. Therefore, they mechanically fell into the smallest loss interval, artificially reducing the zero-earnings discontinuity. Once this dotcom effect is accounted for, our results no longer suggest a sharp (causal) effect of SOX on the decline in the zero-earnings discontinuity.

Faculty

Faculté des sciences économiques et sociales et du management

Department

Département des sciences du Management

Language