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.
|Journal||Review of Quantitative Finance and Accounting|
|Publication status||Accepted/In press - 12 Nov 2021|
- executive compensation
- managerial incentives
- acquisition risk
- Sarbanes-Oxley Act
- corporate governance