The Sarbanes Oxley Act of 2002: Implications for Compensation Contracts and Managerial Risk-Taking

44 Pages Posted: 8 Oct 2008

See all articles by Daniel A. Cohen

Daniel A. Cohen

University of Texas at Dallas - Naveen Jindal School of Management

Aiyesha Dey

Harvard Business School

Thomas Z. Lys

Northwestern University - Kellogg School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 2004

Abstract

The Sarbanes Oxley Act of 2002 (SOX) introduced several governance reforms thatconsiderably 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 passageof SOX. The sensitivity of CEO s wealth to changes in shareholder wealth also decreasedafter SOX. These results indicate that the pay for performance sensitivity of CEOcompensation has declined following SOX. Our results indicate that these changesreduced investments in research and development, and capital expenditures. We also document that the above changes in CEOs pay for performance sensitivities and theirrisky investments following SOX are associated with a reduction in stock returnvolatility. However, we do not find any evidence indicating that these changes areassociated with lower future operating performance.

Suggested Citation

Cohen, Daniel A. and Dey, Aiyesha and Lys, Thomas Z., The Sarbanes Oxley Act of 2002: Implications for Compensation Contracts and Managerial Risk-Taking (July 2004). NYU Working Paper No. DANIEL A. COHEN-02. Available at SSRN: https://ssrn.com/abstract=1280709

Daniel A. Cohen (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-4772 (Phone)
972-883-6811 (Fax)

Aiyesha Dey

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Thomas Z. Lys

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)

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