The Sarbanes Oxley Act of 2002: Implications for Compensation Contracts and Managerial Risk-Taking

Date Added: Sep 2009
Format: PDF

This paper shows that the period following the passage of the Sarbanes Oxley Act of 2002 (SOX) is associated with a significant reduction in compensation-based incentives to take risk, which is related to a decline in risky investments. Moreover, consistent with the rules in SOX directly affecting CEOs' incentives to take risk, the document that the decline in risky investments exceeds the amount that would be expected from changes in compensation packages alone. Finally, the paper documents that these effects are robust to controlling for the market decline in 2000/2001 as well as the passage of SFAS 123R.