Effect of the Sarbanes-Oxley Act on CEOs' Stock Ownership and Pay-Performance Sensitivity

The Sarbanes-Oxley Act (SOX) provides a natural experiment for examining how stock ownership and executive pay structure adapt to a change in regulatory environment. Using annual compensation data of Samp;P 1500 firms in 1994-2005, we examine the impact of SOX on stock ownership and pay-performance sensitivity of CEOs. Consistent with our expectations, we find that in light of SOX: (i) stock ownership and (ii) the total pay-performance sensitivity of CEOs have decreased substantially, indicating that SOX induces a weaker incentive alignment between shareholders and CEOs. In contrast, we find that after SOX stock ownership and the total pay-performance sensitivity of CEOs have remained unchanged in the regulated industries