Sarbanes-Oxley and Firm-Specific Knowledge: Evidence from Inhouse Lawyers

Abstract

The Sarbanes-Oxley Act of 2002 (SOX) entrusted the general counsel (GC) of public companies with overseeing a new system of internal controls and reporting misconduct at their firms. I use a hand-collected dataset tracking the backgrounds of inhouse lawyers to argue that SOX increased the value of “experienced” GCs who had worked at the firm for longer as of 2002. I find that firms with experienced GCs exhibited positive abnormal returns around key legislative dates associated with the passage of SOX. Experienced GCs also saw larger increases in compensation immediately after the passage of SOX. Experienced GCs could be more valuable to the firm since they are: (1). better acquainted with the firm and able to oversee its internal controls, or (2). less independent of senior management and less likely to report misconduct. I find some evidence consistent with the second reason: firms with experienced GCs and larger positive abnormal returns around SOX were more likely to face credible securities class action lawsuits in the years after the legislation passed.

Keywords: Corporate Governance, Corporate misconduct, Executive compensation, Sarbanes-Oxley

JEL Classification: G38, K22, K42, M12, M52