Do <scp>SEC</scp> Enforcement Actions Deter Real Earnings Manipulations of Industry Peers?

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.