The Value of Clawbacks

41 Pages Posted: 20 Jun 2011

See all articles by Paquita Y. Davis-Friday

Paquita Y. Davis-Friday

Zicklin School of Business; City University of New York - Stan Ross Department of Accountancy

Abraham N. Fried

Seton Hall University

Nicole Thorne Jenkins

University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics

Date Written: June 17, 2011

Abstract

We examine whether the adoption of clawback provisions in executive compensation contracts improves the informativeness of accounting information. Contrary to conventional wisdom we find that clawbacks do not lead to improved financial reporting. Specifically, we document a significant decline in the market’s response to earnings surprises after the adoption of both fraud and performance based clawback provisions. In contrast, we find that the market’s reaction to earnings surprises reported by TARP firms after their mandatory clawback adoption is larger than it was in the three years prior to the adoption. In addition, there is evidence that voluntary adopters may be motivated to adopt clawback provisions by the recent occurrence of restatements. Taken together, our results provide a cautionary tale of how some types of clawbacks may produce an unintended consequence in terms of deteriorating the established relation between reported earnings and stock price.

Keywords: Clawback provisions, information content of earnings, earnings response coefficient

JEL Classification: M41

Suggested Citation

Davis-Friday, Paquita Y. and Fried, Abraham N. and Jenkins, Nicole Thorne, The Value of Clawbacks (June 17, 2011). Available at SSRN: https://ssrn.com/abstract=1866527 or http://dx.doi.org/10.2139/ssrn.1866527

Paquita Y. Davis-Friday (Contact Author)

Zicklin School of Business ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States
646-312-3048 (Phone)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3048 (Phone)
646-312-3161 (Fax)

Abraham N. Fried

Seton Hall University ( email )

400 S Orange Avenue
South Orange, NJ 07079
United States
973-275-2956 (Phone)
973-761-9217 (Fax)

Nicole Thorne Jenkins

University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics ( email )

Lexington, KY 40506
United States

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