Abstract

http://ssrn.com/abstract=1980406
 
 

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The Costs and Benefits of Clawback Provisions in CEO Compensation


Mark A. Chen


Georgia State University - Department of Finance

Daniel Greene


Georgia State University - Department of Finance

James E. Owers


Georgia State University - Department of Finance

February 2014


Abstract:     
We analyze the costs and benefits of clawback provisions that enable firms to recover incentive compensation from top management if financials are restated. In a simple model of contracting, we find that clawback provisions lengthen the horizon of managerial incentives and reduce misreporting, but they also increase the riskiness of compensation and can sometimes lead to lower managerial effort and firm value. We empirically test several predictions of the model by examining the voluntary clawback policies of a large sample of publicly-traded firms from 2004 to 2011. In support of the theory, we find that a firm is more likely to use a clawback provision when the CEO faces less uncertainty about earnings. We also find that voluntary clawback provisions are associated with higher reporting quality, greater CEO pay-for-performance sensitivity, and higher CEO compensation.

Number of Pages in PDF File: 69

Keywords: executive compensation, clawback, CEO incentives, recoupment, recapture, fraud

JEL Classification: G30, G34

working papers series


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Date posted: January 8, 2012 ; Last revised: February 20, 2014

Suggested Citation

Chen, Mark A. and Greene, Daniel and Owers, James E., The Costs and Benefits of Clawback Provisions in CEO Compensation (February 2014). Available at SSRN: http://ssrn.com/abstract=1980406 or http://dx.doi.org/10.2139/ssrn.1980406

Contact Information

Mark A. Chen (Contact Author)
Georgia State University - Department of Finance ( email )
35 Broad Street
Suite 1230
Atlanta, GA 30303-3083
United States
Daniel Greene
Georgia State University - Department of Finance ( email )
University Plaza
Atlanta, GA 30303-3083
United States
James Edwin Owers
Georgia State University - Department of Finance ( email )
University Plaza
Atlanta, GA 30303-3083
United States
404-651-2628 (Phone)
404-651-2630 (Fax)
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