IDEAS home Printed from https://ideas.repec.org/p/fip/fedlwp/2015-017.html
   My bibliography  Save this paper

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

Author

Listed:
  • Gayle, George-Levi

    () (Federal Reserve Bank of St. Louis)

  • Li, Chen

    (Zicklin School of Business, Baruch College, CUNY)

  • Miller, Robert A.

    (Tepper School of Business, Carnegie Mellon University)

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

  • Gayle, George-Levi & Li, Chen & Miller, Robert A., 2015. "Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation," Working Papers 2015-17, Federal Reserve Bank of St. Louis, revised 25 Apr 2016.
  • Handle: RePEc:fip:fedlwp:2015-017
    as

    Download full text from publisher

    File URL: https://research.stlouisfed.org/wp/2015/2015-017.pdf
    File Function: Full text
    Download Restriction: no

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

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

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2015-017. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Oates). General contact details of provider: http://edirc.repec.org/data/frbslus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.