Disciplinary Measures in Response to Restatements After Sarbanes-Oxley
Jeffrey J. Burks
University of Notre Dame
April 28, 2009
Journal of Accounting and Public Policy, Vol. 29, No. 3, pp. 195-225, June 2010
This study examines whether boards discipline CEOs and CFOs more severely for accounting restatements after passage of the Sarbanes-Oxley Act (SOX). The disciplinary actions I focus on are job termination and reductions in bonus payouts. Boards have incentive to take the highly visible action of terminating a manager to satisfy demands by outsiders for more vigilant corporate governance after SOX. However, terminating an executive entails the risk of hiring an inferior replacement and other costs. Imposing these costs on the firm and shareholders may not be justified after SOX because the severity of the restatements declines significantly. Despite the pressure on boards to appear vigilant, I find that when disciplining CEOs after SOX, boards gravitate away from termination and toward bonus penalties, a development commensurate with the less severe restatements of the post-SOX period. In contrast, boards appear to strengthen disciplinary action against CFOs after SOX despite the decline in restatement severity.
Keywords: accounting restatements, manager turnover, executive compensation, corporate governance, Sarbanes-Oxley
JEL Classification: M41, M43, G34, G38, J33
Date posted: May 20, 2007 ; Last revised: June 9, 2010
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