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

44 Pages Posted: 26 Jul 2004 Last revised: 24 Apr 2008

Daniel A. Cohen

University of Texas at Dallas - Naveen Jindal School of Management

Aiyesha Dey

University of Minnesota - Twin Cities - Carlson School of Management

Thomas Z. Lys

Northwestern University - Kellogg School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 9, 2007

Abstract

The Sarbanes Oxley Act of 2002 (SOX) introduced several governance reforms that considerably 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 passage of SOX. The sensitivity of CEO's wealth to changes in shareholder wealth also decreased after SOX. These results indicate that the pay for performance sensitivity of CEO compensation has declined following SOX. Our results indicate that these changes reduced investments in research and development, and capital expenditures. We also document that the above changes in CEOs' pay for performance sensitivities and their risky investments following SOX are associated with a reduction in stock return volatility. However, we do not find any evidence indicating that these changes are associated with lower future operating performance.

Keywords: Sarbanes Oxley Act, Executive Compensation, Incentives, Regulation

JEL Classification: J33, G38, G34

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 (November 9, 2007 ). Available at SSRN: https://ssrn.com/abstract=1027448 or http://dx.doi.org/10.2139/ssrn.568483

Daniel A. Cohen

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

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
6126268626 (Phone)

Thomas Z. Lys (Contact Author)

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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