The Effects of Firm-Initiated Clawback Provisions on Earnings Quality and Auditor Behavior
University of Hong Kong
Kevin C. W. Chen
Hong Kong University of Science and Technology
Hong Kong University of Science & Technology - School of Business and Management
Australian National University
January 13, 2012
Journal of Accounting and Economics, Forthcoming
While firm-initiated compensation recovery (or clawback) provisions are gaining popularity and the recently enacted Dodd-Frank Act seeks to make the clawback of erroneously awarded compensation mandatory for all listed companies, little is known about their effectiveness. We find that the incidence of accounting restatements declines after firms initiate such provisions. In addition, we show that investors and auditors view such provisions as associated with increased accounting quality and lower audit risk. Specifically, we find that firms’ earnings response coefficients increase after the adoption of clawback provisions. Further, for firms that adopt clawbacks, auditors are less likely to report material internal control weaknesses, charge lower audit fees, and issue audit reports with a shorter lag.
Number of Pages in PDF File: 50
Keywords: Dodd-Frank Act, clawbacks, restatements
JEL Classification: G30, L50, M41Accepted Paper Series
Date posted: November 29, 2011 ; Last revised: May 2, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.562 seconds