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The Costs and Benefits of CEO Clawback ProvisionsMark A. ChenGeorgia State University - Department of Finance Daniel GreeneGeorgia State University - Department of Finance James E. OwersGeorgia State University - Department of Finance February 1, 2013 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 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 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 voluntarily adopt a clawback provision when the CEO faces less uncertainty about earnings and compensation. We also document that voluntary clawback provisions are associated with improved reporting quality, higher CEO pay-performance sensitivity, and higher CEO compensation.
Number of Pages in PDF File: 65 Keywords: executive compensation, clawback, CEO incentives, recoupment, recapture, fraud JEL Classification: G30, G34 working papers seriesDate posted: January 8, 2012 ; Last revised: February 27, 2013Suggested CitationContact Information
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