Disciplining entrenched managers through corporate governance reform: Implications for risk?taking behavior

Research question/issue This paper examines how enhanced monitoring by corporate boards following the passage of Sarbanes–Oxley Act 2002 and concurrent reforms to stock exchange rules (SOX) mitigated risk-related agency conflicts prevalent in entrenched firms. findings/insights Post-SOX, firms increased risky value-enhancing investments. These investments were financed reductions financial slack dividend payouts lower cost debt. The specific mechanism driving positive changes policies is SOX requirement an independent compensation committee. Managers previously noncompliant with this are rewarded more equity-based pay after SOX, which strengthened their incentives pursue value-creating riskier Only low information asymmetry benefit from requirement. Theoretical/academic implications provides evidence a disciplining effect critically important governance legislation on management. findings suggest that, imposing additional layer discipline managers, managers' willingness take but projects that stifled underscores roles committee alleviating managerial risk avoidance. Practitioner/policy has for ongoing debate among policymakers legislators costs benefits future reforms. Legal enforcement stricter board requirements can realign investment shareholders' interests even presence value-reducing firm-specific arrangements entrench managers. However, majority fully audit committees do not rein chief executive officer (CEO)'s aversion. It instrumental incentivizing CEOs also add value. Firms need be aware effectiveness designing optimal depends access timely accurate information. Other mechanisms considered enhance risk-taking operating high environments.