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Corporate Governance and Executive Pay: Evidence from a Recent Reform

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  • Teodora Paligorova
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    Abstract

    I examine the effect of the Sarbanes-Oxley Act of 2002 (SOX) on the structure of executive pay. Specifically, I consider the increased board oversight implied by SOX, which is expected to weaken the pay-for-performance link under traditional agency models. Alternatively, if entrenched CEOs managed to capture the pay process before SOX, stronger boards are expected to reduce CEO pay for luck and strengthen pay for performance. Using ExecuComp data, I find that the pay-for-performance link increases after 2002, while pay for luck decreases only in firms with weaker board oversight prior to 2002, that is, in firms more affected by SOX stipulations. In contrast, the pay-for-performance link changes little in firms with independent boards.

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    Bibliographic Info

    Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp331.

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    Date of creation: Jul 2007
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    Handle: RePEc:cer:papers:wp331

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    Related research

    Keywords: Corporate governance; The Sarbanes-Oxley Act; incentive pay.;

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    1. Lucian Bebchuk, 2005. "The Growth of Executive Pay," Oxford Review of Economic Policy, Oxford University Press, vol. 21(2), pages 283-303, Summer.
    2. Hallock, Kevin F., 1997. "Reciprocally Interlocking Boards of Directors and Executive Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 331-344, September.
    3. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
    4. Andres Almazan & Javier Suarez, 2003. "Entrenchment and Severance Pay in Optimal Governance Structures," Journal of Finance, American Finance Association, vol. 58(2), pages 519-548, 04.
    5. Bertrand, M. & Mullainathan, S., 1998. "Executive Compensation and Incentives: the Impact of Takeover Legislation," Papers 202, Princeton, Woodrow Wilson School - Public and International Affairs.
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