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Increased Disclosure Requirements and Corporate Governance Decisions: Evidence from Chief Financial Officers in the Pre- and Post–Sarbanes-Oxley Periods

Authors


  • This paper is based on my dissertation completed at the University of Chicago. I thank the members of my dissertation committee: Marianne Bertrand, Ellen Engel, Rachel Hayes, and Abbie Smith (chair). I also thank an anonymous referee, Ray Ball, Jan Barton, Sudipta Basu, Phil Berger (the editor), Kathryn Kadous, Grace Pownall, Jane Thayer, Greg Waymire, Jerry Zimmerman, and workshop participants at the University of British Columbia, the University of Chicago, Emory University, Michigan State University, Ohio State University, Purdue University, the University of Rochester, the University of Southern California, and the University of Texas at Dallas for helpful suggestions. I thank David Shinn and Chun Wang for excellent research assistance. Financial support from the Booth School of Business at the University of Chicago and the Goizueta Business School at Emory University is gratefully acknowledged. An earlier version of this paper circulated under the title “The Impact of the Corporate Governance Reform Initiatives on Chief Financial Officer Compensation.” All errors are my own.

ABSTRACT

I study how increased internal control disclosure requirements mandated by the Sarbanes-Oxley Act (SOX) affect annual corporate governance decisions regarding CFOs. Using non-CEO, non-COO executive officers as a control group, I find that CFOs of firms with weak internal controls receive lower compensation and experience higher forced turnover rates after the passage of SOX. In contrast, CFOs of firms with strong internal controls receive higher compensation and do not experience significant changes in forced turnover rates. These results are consistent with the “disclosure of type” hypothesis, which suggests that the mandatory internal control disclosures under SOX are a credible mechanism that effectively distinguishes good CFOs from bad ones by revealing the firm's internal control quality. The empirical evidence thus supports the notion that mandated increases in disclosure reduce information asymmetry in the executive labor market.

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