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

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  • George-Levi Gayle
  • Chen Li
  • Robert A. Miller

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.

Suggested Citation

  • George-Levi Gayle & Chen Li & Robert A. Miller, 2015. "Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation," Working Papers 2015-17, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2015-017
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    References listed on IDEAS

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    1. Ait-Sahalia, Yacine & Bickel, Peter J. & Stoker, Thomas M., 2001. "Goodness-of-fit tests for kernel regression with an application to option implied volatilities," Journal of Econometrics, Elsevier, vol. 105(2), pages 363-412, December.
    2. George-Levi Gayle & Robert A. Miller, 2015. "Identifying and Testing Models of Managerial Compensation," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 1074-1118.
    3. Antle, R & Smith, A, 1985. "Measuring Executive-Compensation - Methods And An Application," Journal of Accounting Research, Wiley Blackwell, vol. 23(1), pages 296-325.
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    Cited by:

    1. Stephen Terry & Anastasia Zakolyukina & Toni Whited, 2018. "Information Distortion, R&D, and Growth," 2018 Meeting Papers 217, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M50 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

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