The Costs and Benefits of Clawback Provisions in CEO Compensation
Review of Corporate Finance Studies, Forthcoming
78 Pages Posted: 8 Jan 2012 Last revised: 15 Jan 2015
Date Written: November 2014
We analyze the costs and benefits of clawback provisions that enable firms to recover incentive compensation from top management if financials are restated. In a simple contracting model, we find that a clawback provision effectively lengthens the horizon of incentives and curbs misreporting. However, such a provision can add noise to the underlying performance measure, reducing managerial effort and firm value. Our empirical tests support the model’s predictions regarding which types of firms are likely to voluntarily use clawback provisions. We also document that clawback provisions are associated with higher reporting quality, greater CEO-pay-for-performance sensitivity, and higher CEO compensation.
Keywords: executive compensation, clawback, CEO incentives, recoupment, recapture, fraud
JEL Classification: G30, G34
Suggested Citation: Suggested Citation