M&A Performance and the Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts
Anna Bergman Brown
Idaho State University
Paquita Y. Davis-Friday
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, M52working papers series
Date posted: June 20, 2011 ; Last revised: February 14, 2014
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