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University of Chicago Legal Forum

Abstract

The Sarbanes-Oxley Act of 2002 (SOX) entrusted the general counsel (GC) of public companies with overseeing a new system of internal controls and reporting misconduct at their firms. I use a hand-collected dataset tracking the backgrounds of in-house lawyers to argue that SOX increased the value of “experienced” GCs who had worked at the firm for longer as of the legislation’s enactment. I find that firms with experienced GCs exhibited positive abnormal returns around key legislative dates associated with the passage of SOX. Experienced GCs also saw larger increases in compensation immediately after the passage of SOX. Experienced GCs could be more valuable to the firm since they are: (1) better acquainted with the firm and able to oversee its internal controls, or (2) less independent of senior management and less likely to report misconduct. I find some evidence consistent with the second reason: firms with experienced GCs and larger positive abnormal returns around SOX were more likely to face credible securities class action lawsuits in the years after the legislation passed.

This Article’s findings raise two important questions about the role of in-house lawyers and firms’ compliance apparatus in evaluating the impact of major financial legislation. First, compliance with crisis-driven financial legislation may depend on the firm-specific capital accrued by GCs and other personnel situated within the company. In dealing with the fallout from financial disasters, top-down legislative measures ought to account for firm-specific executive dynamics. Second, an employee’s possession of firm-specific capital could be a double-edged sword. While firm-specific capital may allow workers to understand a firm’s culture and business model, it could also allow them to turn a blind eye toward misconduct in their workplace.

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