Section 304 of the Sarbanes-Oxley Act of 2002 (SOX) sets forth a clawback provision that enables a publicly traded company to recover bonuses and other performance-based compensation from the chief executive officers (CEOs) if their company is required to restate financial statements due to material noncomplicances, as a result of misconduct, with financial reporting requirements under the security laws. In this paper we examine the effect of regulatory changes on the sensitivity of CEO bonus to earnings in the cases of good news and bad news in the periods before and after SOX. We find that asymmetric sensitivity of bonus to earnings exists before SOX but disappears in the post-SOX period. This is consistent with the reduced impact of settling up problems due to the clawback provision. This finding shows that regulatory changes affect compensation contracts and has implications for regulators, managers, politicians, investors, and academics in their assessment of the equitable relationship between executive efforts and executive bonus compensation.
Year Project Started:
Professors Jennifer Yin and Gordian Ndubizu
University of Texas at San Antonio and Drexel University
(e.g type 1000 for 1,000)