Management Accounting Section Midyear Meeting

Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation

• In Event: Corporate Governance I

Abstract

This paper investigates the effects of the Sarbanes-Oxley Act (SOX) on CEO
compensation, using panel data constructed for the S&P 1500 firms on CEO
compensation, financial returns, and reported accounting income. Empirically
SOX (i) changes the relationship between a firm's abnormal returns and CEO
compensation, (ii) changes the underlying distribution of abnormal returns,
and (iii) significantly raises the expected CEO compensation in the primary
sector. We develop and estimate a dynamic principal-agent model of hidden
information and hidden actions to explain these regularities. We find that SOX
(i) increased the administrative burden of compliance in the primary sector,
but reduce this burden in the service sector, (ii) increased agency costs in
most categories of the firms, and (iii) reduced the off-equilibrium loss from
the CEO shirking.

Authors

• George-Levi Gayle, Washington University in St. Louis

• Chen Li, CUNY-Baruch College

• Robert A. Miller, Carnegie Mellon University