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The Certification Effect of New Legislation: CEO Accountability for Misconduct After Sarbanes-Oxley

Jo-Ellen Pozner (Santa Clara University, USA)

Aharon Mohliver (London Business School, UK)

Celia Moore (Imperial College Business School, UK)

Organizational Wrongdoing as the “Foundational” Grand Challenge: Consequences and Impact

ISBN: 978-1-83753-283-4, eISBN: 978-1-83753-282-7

Publication date: 25 July 2023

Abstract

We investigate how firms’ responses to misconduct change when the institutional environment becomes more stringent. Organizational theory offers conflicting perspectives on whether new legislation will increase or decrease pressure on firms to take remedial action following misconduct. The dominant perspective posits that new legislation increases expectations of firm behavior, amplifying pressure on them to take remedial action after misconduct. A more recent perspective, however, suggests that the mere necessity to meet more stringent regulatory requirements certifies firms as legitimate to relevant audiences. This certification effect buffers firms, reducing the pressure for them to take remedial action after misconduct. Using a temporary, largely arbitrary exemption from a key provision of the Sarbanes-Oxley Act, we show that firms that were not required to meet all the regulatory standards of good governance it required became 45% more likely to replace their CEOs following the announcement of an earnings restatement after Sarbanes-Oxley. On the other hand, those that were required to meet all of Sarbanes-Oxley’s provisions became 26% less likely to replace their CEOs following a restatement announcement. Ironically, CEOs at firms with a legislative mandate intended to increase accountability for corporate misconduct shoulder less blame than do CEOs at firms without such legislative demands.

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Acknowledgements

Acknowledgments

We would like to thank Colleen Stuart, Brandy Aven, Michaela DeSoucey, Simona Giorgi, Andreea Gorbatai, Olenka Kacperczyk, Ming Leung, Kelly Patterson, Seemantini Pathak, Sara Soderstrom, Sameer Srivastava, Adina Sterling, and Mathijs de Vaan, for their comments on earlier versions of this paper. An earlier version of this paper was available on SSRN.

Citation

Pozner, J.-E., Mohliver, A. and Moore, C. (2023), "The Certification Effect of New Legislation: CEO Accountability for Misconduct After Sarbanes-Oxley", Gabbioneta, C., Clemente, M. and Greenwood, R. (Ed.) Organizational Wrongdoing as the “Foundational” Grand Challenge: Consequences and Impact (Research in the Sociology of Organizations, Vol. 85), Emerald Publishing Limited, Leeds, pp. 11-33. https://doi.org/10.1108/S0733-558X20230000085002

Publisher

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Emerald Publishing Limited