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

George-Levi Gayle (), Chen Li and Robert A. Miller
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Chen Li: Zicklin School of Business, Baruch College, CUNY
Robert A. Miller: Tepper School of Business, Carnegie Mellon University

No 2015-17, Working Papers from Federal Reserve Bank of St. Louis

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-codes: C10 C12 C13 J30 J33 M50 M52 M55 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cta and nep-hrm
Date: 2015-08-20, Revised 2016-04-25
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