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Changes in Bonus Contracts in the Post-Sarbanes-Oxley Era

43 Pages Posted: 21 Nov 2007 Last revised: 23 Apr 2009

Mary Ellen Carter

Boston College - Department of Accounting

Luann J. Lynch

University of Virginia - Darden School of Business

Sarah L. C. Zechman

University of Colorado at Boulder - Leeds School of Business

Date Written: 2009

Abstract

We examine whether the relation between earnings and bonuses changes after Sarbanes-Oxley. Theory predicts that, as the financial reporting system reduces the discretion allowed managers, firms will put more weight on earnings in compensation contracts to encourage effort. However, the increased risk imposed by Sarbanes-Oxley on executives may cause firms to temper this contracting outcome. We examine and find support for the joint hypothesis that the implementation of Sarbanes-Oxley and related reforms led to a decrease in earnings management and that firms responded by placing more weight on earnings in bonus contracts. We find no evidence that firms changed compensation contracts to compensate executives for assuming more risk.

Keywords: Executive compensation, bonuses, Sarbanes-Oxley

JEL Classification: M41, M43, J33, M52, G38

Suggested Citation

Carter, Mary Ellen and Lynch, Luann J. and Zechman, Sarah L. C., Changes in Bonus Contracts in the Post-Sarbanes-Oxley Era (2009). Review of Accounting Studies, Vol. 14, No. 4, 2009. Available at SSRN: https://ssrn.com/abstract=1031400

Mary Ellen Carter (Contact Author)

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Luann J. Lynch

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

Sarah L. C. Zechman

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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