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

83 Pages Posted: 10 Mar 2021

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 Miller

Carnegie Mellon University - David A. Tepper School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 22, 2020

Abstract

This paper investigates the effects of regulatory interventions on contracting relationships within firms by examining the impacts of the Sarbanes-Oxley Act (SOX) on CEO compensation. Using panel data of the S&P 1500 firms, it quantifies welfare gains from a dynamic principal-agent model of hidden information and hidden actions. It finds that SOX: (i) did not change CEOs' risk attitude, (ii) improved the shareholders -- CEOs interest alignment by reducing shareholders' loss from CEOs shirking and CEOs' benefits from shirking, and (iii) slightly reduced the administrative costs and mainly increased the agency costs embedded in CEO compensation. Cross-sectionally, it finds favorable impacts of SOX most often in the consumer goods sector, which is the least regulated among the three sectors we study. It finds no systematic patterns of SOX's impact varying with firm size.

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

Suggested Citation

Gayle, George-Levi and Li, Chen and Miller, Robert, Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation (October 22, 2020). Available at SSRN: https://ssrn.com/abstract=3159713 or http://dx.doi.org/10.2139/ssrn.3159713

George-Levi Gayle

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 Miller (Contact Author)

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

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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