The Effects of Firm-Initiated Clawback Provisions on Earnings Quality and Auditor Behavior

Journal of Accounting and Economics, Forthcoming

50 Pages Posted: 29 Nov 2011 Last revised: 2 May 2012

See all articles by Lilian H. Chan

Lilian H. Chan

The University of Hong Kong

Kevin C. W. Chen

Hong Kong University of Science and Technology

Tai-Yuan CHEN

Department of Accounting, HKUST Business School, Hong Kong University of Science & Technology

Yangxin Yu

City University of Hong Kong

Date Written: January 13, 2012

Abstract

While firm-initiated compensation recovery (or clawback) provisions are gaining popularity and the recently enacted Dodd-Frank Act seeks to make the clawback of erroneously awarded compensation mandatory for all listed companies, little is known about their effectiveness. We find that the incidence of accounting restatements declines after firms initiate such provisions. In addition, we show that investors and auditors view such provisions as associated with increased accounting quality and lower audit risk. Specifically, we find that firms’ earnings response coefficients increase after the adoption of clawback provisions. Further, for firms that adopt clawbacks, auditors are less likely to report material internal control weaknesses, charge lower audit fees, and issue audit reports with a shorter lag.

Keywords: Dodd-Frank Act, clawbacks, restatements

JEL Classification: G30, L50, M41

Suggested Citation

Chan, Lilian H. and Chen, Kevin C.W. and Chen, Tai-Yuan and Yu, Yangxin, The Effects of Firm-Initiated Clawback Provisions on Earnings Quality and Auditor Behavior (January 13, 2012). Journal of Accounting and Economics, Forthcoming , Available at SSRN: https://ssrn.com/abstract=1965921 or http://dx.doi.org/10.2139/ssrn.1965921

Lilian H. Chan

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Kevin C.W. Chen

Hong Kong University of Science and Technology ( email )

Clear Water Bay
Kowloon
Hong Kong
+852 2358-7585 (Phone)
+852 2358-1693 (Fax)

Tai-Yuan Chen (Contact Author)

Department of Accounting, HKUST Business School, Hong Kong University of Science & Technology ( email )

Clear Water Bay
Kowloon
Hong Kong

Yangxin Yu

City University of Hong Kong ( email )

Hong Kong

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