Sarbanes-Oxley, Governance and Performance
University of Colorado at Boulder - Department of Finance
Brian J. Bolton
Portland State University - School of Business Administration
March 17, 2009
We study the relationship between corporate governance and company performance. We consider five measures of corporate governance during the period 1998-2007. Given the passage of Sarbanes-Oxley Act (SOX) during 2002, we separate the sample into pre-2002 and post-2002 periods to study how governance-performance relationships might have been impacted by this regulation.
We find a negative and significant relationship between board independence and operating performance during the pre-2002 period, but a positive and significant relationship during the post-2002 period. The stock ownership of directors is consistently positively and significantly related to performance through each of the subperiods. Other measures, such as the governance indices introduced by Gompers, Ishii and Metrick (2003) and Bebchuk, Cohen and Ferrell (2009) provide inconsistent results. We conclude that corporate governance studies should consider director stock ownership as the most reliable measure of governance.
We further investigate the relationship between SOX, governance and performance by examining how CEOs are disciplined following poor performance. We find that board independence and director stock ownership appear to be effective governance mechanisms for replacing the CEO following poor performance.
Number of Pages in PDF File: 51
Keywords: Board independence, corporate governance, corporate performance
JEL Classification: G30
Date posted: March 18, 2009