Integrity, unprincipled agents and corporate governance reform Daniel G. Arce Ó Springer Science+Business Media New York 2015 Abstract This study investigates the implications of integrity—interpreted as the alignment of one’s words and deeds—within the agency paradigm by explicitly allowing for unprincipled behavior (agent misconduct) in addition to conflicts of interest resulting from the separation of ownership and control. Under adverse selection, contracts that screen for agents who exhibit integrity characterize a pre- viously unidentified symbiosis between the penalty for unprincipled behavior and high-powered incentive pay. The resulting contracts and penalties are interpreted in light of the Sarbanes–Oxley and Dodd–Frank Acts. Keywords Unprincipled agents  Integrity  Punishment  Incentive pay  Adverse selection  Sarbanes–Oxley, Dodd–Frank JEL Classification K22  L21  M14  M52 1 Introduction The dot.com and global financial crises of the first decade of the new millennium have sparked a public debate over the role that pay-for-performance plays in the alignment and control of incentive (agency) problems within firms. Indeed, those who advocate government regulation of executive pay and/or increased shareholder activism with respect to compensation packages often argue that incentive pay encourages unprincipled actions on the part of corporate agents who would otherwise be out-of-the-money relative to their performance criteria. Yet with few D. G. Arce (&) Ashbel Smith Professor of Economics, University of Texas at Dallas, GR 31, 800 W. Campbell Rd., Richardson, TX 75080, USA e-mail: darce@utdallas.edu 123 Eur J Law Econ DOI 10.1007/s10657-014-9478-4