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M&A Performance and the Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts

Anna Bergman Brown

Idaho State University

Paquita Y. Davis-Friday

CUNY-Baruch College

Lale Guler

Koc University

January 29, 2013

Although many M&As result in value-destruction and earnings restatements, CEOs receive significant bonuses for completing them. Therefore we investigate whether M&A performance affects firms’ decisions to voluntarily adopt clawback provisions in executive compensation contracts. We conjecture that corporate boards view clawback provisions as an effective mechanism for reclaiming bonus compensation earned from an M&A transaction that subsequently fails or leads to earnings restatements, and for inducing managerial decision making that is more aligned with shareholders’ interests. Consistent with our expectations, we find that (1) firms with more negative announcement returns from M&As are more likely to adopt a clawback provision, (2) clawback provisions improve investors’ perception of the quality of M&A transactions, and (3) executives are more likely to listen to the market when deciding whether to complete a deal if their compensation contracts include clawback provisions. These results confirm that boards take a pro-active approach and consider the factors that may lead to restatements in the future when deciding whether to adopt clawback provisions. Our results have implications for policymakers as they attempt to regulate the ability of executives to extract rents from shareholders through the provisions of the Dodd-Frank Act (2010).

Number of Pages in PDF File: 47

Keywords: Executive Compensation, Mergers & Acquisitions, Clawback Provisions

JEL Classification: M12, M41, M52

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Date posted: June 20, 2011 ; Last revised: February 14, 2014

Suggested Citation

Brown, Anna Bergman and Davis-Friday, Paquita Y. and Guler, Lale, M&A Performance and the Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts (January 29, 2013). Available at SSRN: http://ssrn.com/abstract=1866495 or http://dx.doi.org/10.2139/ssrn.1866495

Contact Information

Anna Bergman Brown
Idaho State University ( email )
921 South 8th Avenue
Pocatello, ID 83209
United States
Paquita Y. Davis-Friday (Contact Author)
CUNY-Baruch College ( email )
One Bernard Baruch Way
New York, NY 10010
United States
646-312-3385 (Phone)
646-312-3161 (Fax)
Lale Guler
Koc University ( email )
Rumelifeneri Yolu
34450 Sar?yer
Istanbul, 34450
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