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

David Hillier (), Patrick McColgan () and Athanasios Tsekeris ()
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David Hillier: University of Strathclyde
Patrick McColgan: University of Strathclyde
Athanasios Tsekeris: Glasgow Caledonian University

Review of Quantitative Finance and Accounting, 2022, vol. 58, issue 4, No 4, 1395-1450

Abstract: Abstract 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.

Keywords: Executive compensation; Managerial incentives; Acquisition risk; Sarbanes–Oxley Act; Corporate governance (search for similar items in EconPapers)
JEL-codes: G32 G34 G38 M12 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11156-021-01028-6

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