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M&A Decisions and U.S. Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts

Journal of Business Finance & Accounting, Vol. 42, Issue 1-2, pp. 237-271, 2015.

48 Pages Posted: 20 Jun 2011 Last revised: 7 Sep 2016

Anna Bergman Brown

University of Connecticut - Department of Accounting

Paquita Y. Davis-Friday

CUNY-Baruch College

Lale Guler

University of Texas at Dallas - Department of Accounting & Information Management

Carol A. Marquardt

City University of New York (CUNY) – Baruch College

Date Written: December 15, 2014

Abstract

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.

Keywords: Mergers & Acquisitions; Clawback Provisions; Restatements

JEL Classification: M12, M41, M52

Suggested Citation

Brown, Anna Bergman and Davis-Friday, Paquita Y. and Guler, Lale and Marquardt, Carol A., M&A Decisions and U.S. Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts (December 15, 2014). Journal of Business Finance & Accounting, Vol. 42, Issue 1-2, pp. 237-271, 2015.. Available at SSRN: https://ssrn.com/abstract=1866495 or http://dx.doi.org/10.2139/ssrn.1866495

Anna Bergman Brown

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Paquita Y. Davis-Friday

CUNY-Baruch College ( email )

One Bernard Baruch Way
New York, NY 10010
United States
646-312-3385 (Phone)
646-312-3161 (Fax)

Lale Guler (Contact Author)

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

Carol Marquardt

City University of New York (CUNY) – Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3241 (Phone)

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