How did the Sarbanes–Oxley Act affect managerial incentives? Evidence from corporate acquisitions

We examine the impact of incentive compensation on the riskiness of acquisition decisions before and after the passage of the Sarbanes–Oxley Act (SOX). Before SOX, equity-based compensation was positively related to changes in risk around acquisition decisions, but this relationship weakened after the introduction of SOX. The drop in post-SOX acquisition-related risk stems from how managers respond to compensation-based incentives in the new regulatory environment. We show that executive stock options and pay-risk sensitivity drive post-SOX managerial responsiveness to risk-taking incentives. We also document a post-SOX value-enhancing effect on long-term stock-price performance and total factor productivity through these same incentive compensation mechanisms. The results are robust to selection bias, simultaneity, measurements of risk, and the definition of incentive compensation.