Impact of Sox on CEO Compensation and Earnings Management

Abstract

CEO compensation increased steadily these last years, the increase is mainly related to the fraction of compensation derived from stock-options. Moreover, earnings management increased and coincided with the major accounting scandals. We document that there was a significant decline in the ratio of incentive compensation to salary after the passage of SOX. We also show that earnings management decreased after the passage of SOX and we conclude that the opportunistic behaviour of managers, primarily related to incentive compensation, was significantly associated with earnings management in the period preceding SOX.