ABSTRACT This paper examines whether SEC enforcement actions deter real earnings management (REM) by peer firms. Motivated by competing deterrence and substitution hypotheses, I find that peer firms significantly reduce REM in the quarter of a triggering event, consistent with deterrence. The effect is stronger for severe cases and robust across specifications. However, the deterrence effect weakens after the Sarbanes–Oxley Act, suggesting that REM became a more attractive alternative under stricter regulation. These findings underscore the complexity of regulating REM and support the SEC's recent focus on curbing such behaviour.
Zhexu Ai (Mon,) studied this question.