Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation

71 Pages Posted: 27 Aug 2015 Last revised: 3 Jan 2019

See all articles by George-Levi Gayle

George-Levi Gayle

Washington University in St. Louis - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Chen Li

New York University (NYU) - New York University (NYU), Shanghai

Robert A. Miller

Carnegie Mellon University - David A. Tepper School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 2015-08-20

Abstract

This paper investigates the effects of the Sarbanes-Oxley Act (SOX) on CEO compensation, using panel data constructed for the S&P 1500 firms on CEO compensation, financial returns, and reported accounting income. Empirically SOX (i) changes the relationship between a firm’s abnormal returns and CEO compensation, (ii) changes the underlying distribution of abnormal returns, and (iii) significantly raises the expected CEO compensation in the primary sector. We develop and estimate a dynamic principal agent model of hidden information and hidden actions to explain these regularities. We find that SOX (i) increased the administrative burden of compliance in the primary sector, but reduce this burden in the service sector, (ii) increased agency costs in most categories of the firms, and (iii) reduced the off-equilibrium loss from the CEO shirking.

JEL Classification: C10, C12, C13, J30, J33, M50, M52, M55

Suggested Citation

Gayle, George-Levi and Li, Chen and Miller, Robert A., Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation (2015-08-20). FRB St. Louis Working Paper No. 2015-17, Available at SSRN: https://ssrn.com/abstract=2652122

George-Levi Gayle (Contact Author)

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

HOME PAGE: http://https://artsci.wustl.edu/~ggayle/

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

Chen Li

New York University (NYU) - New York University (NYU), Shanghai ( email )

1555 Century Ave
Shanghai, Shanghai 200122
China

HOME PAGE: http://sites.google.com/view/chen-li

Robert A. Miller

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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