Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality?

53 Pages Posted: 2 May 2012 Last revised: 22 Oct 2013

See all articles by Ed deHaan

Ed deHaan

Stanford Graduate School of Business

Frank D. Hodge

University of Washington - Michael G. Foster School of Business

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Date Written: April 2, 2012

Abstract

We examine whether financial reporting quality improves after firms voluntarily adopt a compensation clawback provision. Clawback provisions allow companies to recoup excess incentive pay in the event of an accounting restatement, and are intended to ex ante deter managers from publishing misstated accounting information and to ex post penalize managers who do so. For the period 2007-2009, our difference-in-differences analysis reveals significant improvements in both actual and perceived financial reporting quality following clawback adoption, relative to a propensity-matched set of control firms. We also find an increase in compensation for CEOs who are subject to new clawback provisions, as well as an increase in the sensitivity of cash compensation to accounting performance. In cross-sectional tests, our findings indicate that “robust” clawback provisions, those that apply to restatements caused by either intentional or unintentional errors, have an incrementally larger impact on financial reporting quality and compensation than do clawback provisions that apply only to restatements involving fraud.

Keywords: compensation clawback provisions, financial reporting quality, executive compensation

JEL Classification: K22, M41, M48, M52

Suggested Citation

deHaan, Ed and Hodge, Frank Douglas and Shevlin, Terry J. and Shevlin, Terry J., Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality? (April 2, 2012). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2049442 or http://dx.doi.org/10.2139/ssrn.2049442

Ed DeHaan

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, 94305
United States

Frank Douglas Hodge

University of Washington - Michael G. Foster School of Business ( email )

Paccar Hall 540, Box 353200
Seattle, WA 98195-3200
United States
206-616-8598 (Phone)
206-685-9392 (Fax)

Terry J. Shevlin (Contact Author)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

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