Sarbanes‐Oxley Act and the acquisition of private targets

Using a sample of private targets of public acquirers in the US, we find that after the passage of the Sarbanes Oxley Act, acquirer announcement returns are lower, targets are larger, suffer from lower valuation discounts, and receive higher acquisition premiums relative to similar acquisitions pre‐SOX. In addition, acquirer returns are negatively related to proxies for the private target's readiness to comply with SOX Section 404 (quality of internal controls). Our evidence suggests that post‐SOX, private targets are less opaque, have lower valuation uncertainty, and enjoy stronger bargaining position resulting from tighter internal controls around reporting and disclosure.