Abstract
Governments increasingly encourage private companies to self-regulate and voluntarily avoid risky businesses to comply with economic sanctions. Does state-led private governance work, and if so, how? I argue that state-directed private governance improves prudence among firms with high perceived business-specific and transaction-specific risks. Focusing on a 2019 US framework, I examine private sanction compliance in cross-border mergers and acquisitions (M&As). Empirically, I develop a sector-based measure of business-specific sanction risk perception using past OFAC enforcement cases. I then conduct transaction-level analyses on 7,749 cross-border M&As from the Orbis dataset. Post-framework, M&As involving risky-sector acquirers are, on average, 18% less likely to succeed if due diligence extends beyond five months, indicating significant transaction-specific risks. This reduction in success could reach 68% when due diligence lasts 33 months. However, this difference is insignificant pre-framework. These findings suggest that private self-regulation complements state regulatory oversight in economic statecraft, enabling informed business decisions.