The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors

Authors: Linck, James S.; Netter, Jeffry M.; Yang, Tina

Source: Review of Financial Studies, Volume 22, Number 8, 29 August 2009 , pp. 3287-3328(42)

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Abstract:

Using eight thousand public companies, we study the impact of the Sarbanes-Oxley Act (SOX) of 2002 and other contemporary reforms on directors and boards, guided by their impact on the supply and demand for directors. SOX increased directors' workload and risk (reducing the supply), and increased demand by mandating that firms have more outside directors. We find both broad-based changes and cross-sectional changes (by firm size). Board committees meet more often post-SOX and Director and Officer (D&O) insurance premiums have doubled. Directors post-SOX are more likely to be lawyersconsultants, financial experts, and retired executives, and less likely to be current executives. Post-SOX boards are larger and more independent. Finally, we find significant increases in director pay and overall director costs, particularly among smaller firms.

Keywords: D23; G32; G34; G38; K22; M14

Document Type: Research article

DOI: http://dx.doi.org/10.1093/rfs/hhn084

Publication date: 2009-08-29

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The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.