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Federal Reserve Bank of St. Louis
Working Papers
Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation
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.


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George-Levi Gayle & Chen Li & Robert A. Miller, Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation, Federal Reserve Bank of St. Louis, Working Papers 2015-17, 20 Aug 2015, revised 25 Apr 2016.
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