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Disciplinary measures in response to restatements after Sarbanes-Oxley

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  • Burks, Jeffrey J.

Abstract

This study examines whether boards discipline CEOs and CFOs more severely for accounting restatements after passage of the Sarbanes-Oxley Act (SOX). The disciplinary actions I focus on are job termination and reductions in bonus payouts. Boards have incentive to take the highly visible action of terminating a manager to satisfy demands by outsiders for more vigilant corporate governance after SOX. However, terminating an executive entails the risk of hiring an inferior replacement and other costs. Imposing these costs on the firm and shareholders may not be justified after SOX because the severity of the restatements declines significantly. Despite the pressure on boards to appear vigilant, I find that when disciplining CEOs after SOX, boards gravitate away from termination and toward bonus penalties, a development commensurate with the less severe restatements of the post-SOX period. In contrast, boards appear to strengthen disciplinary action against CFOs after SOX despite the decline in restatement severity.

Suggested Citation

  • Burks, Jeffrey J., 2010. "Disciplinary measures in response to restatements after Sarbanes-Oxley," Journal of Accounting and Public Policy, Elsevier, vol. 29(3), pages 195-225, June.
  • Handle: RePEc:eee:jappol:v:29:y:2010:i:3:p:195-225
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    Cited by:

    1. Martin J. Conyon & Lerong He, 2016. "Executive Compensation and Corporate Fraud in China," Journal of Business Ethics, Springer, pages 669-691.
    2. Masahiro Enomoto & Tomoyasu Yamaguchi, 2015. "Discontinuities in Earnings and Earnings Change Distributions after J-SOX Implementation: Empirical evidence from Japan," Discussion Paper Series DP2015-26, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2016.
    3. Beneish, Messod D. & Marshall, Cassandra D. & Yang, Jun, 2017. "Explaining CEO retention in misreporting firms," Journal of Financial Economics, Elsevier, vol. 123(3), pages 512-535.
    4. Friedman, Henry L., 2014. "Implications of power: When the CEO can pressure the CFO to bias reports," Journal of Accounting and Economics, Elsevier, vol. 58(1), pages 117-141.
    5. Kryzanowski, Lawrence & Zhang, Ying, 2013. "Financial restatements and Sarbanes–Oxley: Impact on Canadian firm governance and management turnover," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 87-105.
    6. Aharony, Joseph & Liu, Chelsea & Yawson, Alfred, 2015. "Corporate litigation and executive turnover," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 268-292.

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