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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

Mark A. Chen

Georgia State University - Department of Finance

Daniel Greene

Clemson University

James E. Owers

Georgia State University - Department of Finance

Date Written: November 2014

Abstract

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

Chen, Mark A. and Greene, Daniel and Owers, James E., The Costs and Benefits of Clawback Provisions in CEO Compensation (November 2014). Review of Corporate Finance Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1980406 or http://dx.doi.org/10.2139/ssrn.1980406

Mark A. Chen (Contact Author)

Georgia State University - Department of Finance ( email )

35 Broad Street
Suite 1230
Atlanta, GA 30303-3083
United States

Daniel Greene

Clemson University ( email )

101 Sikes Ave
Clemson, SC 29634
United States

James Edwin Owers

Georgia State University - Department of Finance ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2628 (Phone)
404-651-2630 (Fax)

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