The Sarbanes Oxley Act of 2002: Implications for Compensation Contracts and Managerial Risk-Taking
Daniel A. Cohen
University of Texas at Dallas - Naveen Jindal School of Management
University of Minnesota - Twin Cities - Carlson School of Management
Thomas Z. Lys
Northwestern University - Kellogg School of Management
November 9, 2007
The Sarbanes Oxley Act of 2002 (SOX) introduced several governance reforms that considerably increased the total risk exposure of CEOs. We examine the effects of these regulatory changes on compensation contracts of CEOs and their effect on risk taking subsequent to SOX. We find that while overall compensation did not change, salary and bonus compensation increased and option compensation decreased following the passage of SOX. The sensitivity of CEO's wealth to changes in shareholder wealth also decreased after SOX. These results indicate that the pay for performance sensitivity of CEO compensation has declined following SOX. Our results indicate that these changes reduced investments in research and development, and capital expenditures. We also document that the above changes in CEOs' pay for performance sensitivities and their risky investments following SOX are associated with a reduction in stock return volatility. However, we do not find any evidence indicating that these changes are associated with lower future operating performance.
Number of Pages in PDF File: 44
Keywords: Sarbanes Oxley Act, Executive Compensation, Incentives, Regulation
JEL Classification: J33, G38, G34
Date posted: July 26, 2004 ; Last revised: April 24, 2008
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