This paper examines risk-averse managers’ incentive to “play it safe” by taking value-destroying
actions that reduce their firms’ risk of distress. We find that, after managers are insulated by the passage of an antitakeover law, firms increase diversifying acquisitions by about a third relative to firms that operate in the same state and industry
but are not affected by the law. These acquisitions target “cash cows,” are funded largely with equity, and are concentrated among firms with a greater risk of distress. Consistent
with a reduction firm-level risk, we also find that affected firms’ stock volatility decreases and their cash holdings increase. Our findings suggest that shareholders face governance challenges beyond motivating managerial effort.