The Value of Clawbacks
41 Pages Posted: 20 Jun 2011
Date Written: June 17, 2011
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: Suggested Citation