Incentive pay and acquirer returns – The impact of Sarbanes–Oxley

• Regulation (SOX) has not reduced the importance of pay-for-performance.
• The importance of pay-for-performance varies with acquisition type.
• Bidders with high pay-for-performance do not necessarily outperform in the long run.

This study examines how pay-for-performance influences the quality of merger decisions before and after Sarbanes–Oxley (SOX). Pay-for performance has a significant positive effect on acquirer returns of 0.9% pre-SOX and 1.1% post-SOX around the three-day event window. Bidders with high pay-for-performance pay a 23.3% lower merger premium in listed target acquisitions. The positive effect of pay-for-performance is more important for public target acquisitions overall, for small acquirers pre-SOX, and for large acquirers post-SOX. In the long run, bidders with high pre-merger pay-for-performance do not necessarily outperform.