Effect of SEC enforcement actions on forced turnover of executives: Evidence associated with SOX provisions

Abstract

This study examines the impact of SEC enforcement actions on the turnovers of culpable CEOs and CFOs named in the enforcement actions, following their violations of the SOX provisions. We compare the impact on CEO turnover with that on CFO turnover. The impact in the pre-SOX period and that in the post-SOX period are also compared. Findings of this study provide evidence that the SEC enforcement actions are associated with the probabilities of turnovers of CEOs and CFOs named in the SEC enforcement actions for violations of SOX 303 and SOX 305. Specifically, CEOs sanctioned by the SEC are likely to lose their positions when they violate SOX 305. In contrast, CFOs sanctioned by the SEC for violating SOX 303 are likely to be forced to resign. When CFOs are named as mastermind by the SEC, they are likely to lose jobs. However, when both CEO and CFO are named as masterminds in fraudulent financial reporting, CFOs are less likely to be removed. In addition, CEOs and CFOs are likely to lose their jobs when firms face bankruptcy and restate earnings and when they face criminal charges, especially in the post-SOX period.