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Prevalence of the Zero-Earnings Discontinuity in Quarterly Reported Earnings

Leonidas Enrique de la Rosa et al.

Journal of Accounting Auditing and Finance2025https://doi.org/10.1177/0148558x251338599article
AJG 3ABDC A
Weight
0.36

Abstract

We examine the persistence of the zero-earnings discontinuity in quarterly earnings around the adoption of the Sarbanes-Oxley Act in 2002. Previous studies find that the zero-earnings discontinuity in annual earnings disappears after the adoption of the Act, likely due to the stricter regulatory environment. We hypothesize that the adoption coincides with a relatively smaller reduction in the zero-earnings discontinuity in quarterly earnings, since interim financial statements are unaudited. Consistent herewith, we find that the zero-earnings discontinuity in quarterly earnings persists after the adoption of the Act. This is driven by the reduction in the zero-earnings discontinuities being weaker in magnitude for quarterly earnings compared to annual earnings. We find similar results using changes in earnings as well as analysts’ earnings forecast errors. Our findings are relevant for both regulators and academics in assessing the role of auditors in the adoption of SOX.

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https://doi.org/https://doi.org/10.1177/0148558x251338599

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@article{leonidas2025,
  title        = {{Prevalence of the Zero-Earnings Discontinuity in Quarterly Reported Earnings}},
  author       = {Leonidas Enrique de la Rosa et al.},
  journal      = {Journal of Accounting Auditing and Finance},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1177/0148558x251338599},
}

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Prevalence of the Zero-Earnings Discontinuity in Quarterly Reported Earnings

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Evidence weight

0.36

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.16 × 0.4 = 0.06
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.