Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/53962
Authors: 
Paligorova, Teodora
Year of Publication: 
2008
Series/Report no.: 
Bank of Canada Working Paper 2008,20
Abstract: 
According to the rent-extraction hypothesis, weak corporate governance allows entrenched CEOs to capture the pay-setting process and benefit from events outside of their controlget paid for luck. In this paper, I find that the independence requirement imposed on boards of directors by the Sarbanes-Oxley Act of 2002 (SOX), together with the governance regulations subsequently introduced by stock exchanges, affects CEO pay structure. In firms whose corporate boards were originally less independent, and thus more affected by these provisions, CEO pay for performance strengthened while pay for luck decreased after adopting SOX. In contrast, those firms that exhibited strong board independence prior to SOX showed little evidence of pay for luck and little change in pay for performance following the adoption of SOX. The results are consistent with the rent-extraction hypothesis, and they are robust to alternative explanations such as asymmetric benchmarks, oligopoly, and managerial talent.
Subjects: 
Labour markets
JEL: 
G38
J33
M52
Document Type: 
Working Paper

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