M&A Decisions and U.S. Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts
Anna Bergman Brown
University of Connecticut
Paquita Y. Davis-Friday
University of Texas at Dallas - Department of Accounting & Information Management
Carol A. Marquardt
City University of New York (CUNY) – Baruch College
December 15, 2014
Journal of Business Finance & Accounting, Vol. 42, Issue 1-2, pp. 237-271, 2015.
We examine whether U.S. firms’ M&A decisions influence the likelihood of voluntary adoption of clawback provisions in executive compensation contracts and whether clawback adoption improves subsequent M&A decisions. Because prior research finds that poor M&A decisions are associated with future earnings restatements, we predict that clawback adoption is more likely after these transactions. We further conjecture that M&A decisions will improve after clawback adoption, as its presence reduces executives’ willingness to manipulate post-acquisition earnings. Consistent with our expectations, we find that (1) firms with more negative M&A announcement returns are more likely to adopt clawbacks; (2) firms that acquire targets with relatively poor accounting quality are more likely to adopt clawbacks; (3) clawbacks improve investor perception of M&A quality; and (4) executives are more responsive to the market when completing M&A deals if their compensation contracts include clawbacks. These results suggest that boards take a pro-active approach and consider factors that may lead to restatements when adopting clawbacks. Our results have implications for U.S. policymakers, as the Dodd-Frank Act of 2010 requires mandatory adoption of clawbacks. Our results also suggest that non-U.S. firms can reduce managerial incentives to manipulate post-takeover earnings by using clawbacks.
Number of Pages in PDF File: 48
Keywords: Mergers & Acquisitions; Clawback Provisions; Restatements
JEL Classification: M12, M41, M52
Date posted: June 20, 2011 ; Last revised: September 7, 2016