Incentive compensation vs. SOX: evidence from corporate acquisition decisions

Patrick McColgan, David Hillier, Athanasios Tsekeris

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Abstract

We empirically examine the impact of incentive compensation on the riskiness of acquisition decisions before and after the passage of Sarbanes-Oxley Act (SOX). Controlling for confounding events, firm characteristics and industry fixed effects, we find a substantial change in the relation between equity-related compensation and acquisition risk post-SOX stemming from a previously unidentified shift in the effectiveness of executive stock options to control managerial risk aversion. Not only has incentive compensation failed to offset the adverse impact of SOX on risk-taking activity but it has also significantly altered managerial incentives. The decrease in acquisition risk post-SOX cannot be solely attributed to changes in the structure of executive compensation but it additionally stems from the way managers perceive compensation-based incentives in the new regulatory environment. The results are robust to different measures of acquisition risk and alternative definitions of incentive compensation.
Original languageEnglish
Number of pages43
Publication statusPublished - 18 Oct 2014
EventFinancial Management Association Annual Meeting 2014 - Gaylord Opryland Resort & Convention Center , Nashville, Tennessee, United States
Duration: 15 Oct 201418 Oct 2014

Conference

ConferenceFinancial Management Association Annual Meeting 2014
CountryUnited States
CityNashville, Tennessee
Period15/10/1418/10/14

Keywords

  • Sarbanes-Oxley Act
  • equity-related compensation
  • corporate acquisition

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  • Cite this

    McColgan, P., Hillier, D., & Tsekeris, A. (2014). Incentive compensation vs. SOX: evidence from corporate acquisition decisions. Paper presented at Financial Management Association Annual Meeting 2014, Nashville, Tennessee, United States.