Abstract

http://ssrn.com/abstract=2049442
 
 

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


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

April 2, 2012

Contemporary Accounting Research, Forthcoming

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.

Number of Pages in PDF File: 53

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

JEL Classification: K22, M41, M48, M52

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Date posted: May 2, 2012 ; Last revised: October 22, 2013

Suggested Citation

deHaan, Ed and Hodge, Frank D. 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: http://ssrn.com/abstract=2049442 or http://dx.doi.org/10.2139/ssrn.2049442

Contact Information

Ed DeHaan
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States

Frank Douglas Hodge
University of Washington - Michael G. Foster School of Business ( email )
261 Mackenzie Hall, 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 92697-3125
United States
206-550-9891 (Phone)
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