Clawback Provisions

Abstract

We provide a detailed analysis of 4,103 compensation clawback provisions used by S&P 1,500 firms from 2000–2013. The adoption and breadth of a clawback provision are related to the scope for executive malfeasance, compensation-related reasons to misrepresent performance; and firm governance. Executives respond to clawbacks by lowering firm risk and pursuing more conservative corporate policies, including reduced investment and R&D spending and fewer patent filings. The stock market reacts positively to the news of clawback adoption and the value increase is larger for stronger provisions and when the market can expect a more sizable reduction in firm risk. Overall, clawbacks appear to serve as more than simple window-dressing and appear to be tailored to fit firm and managerial characteristics.

Keywords: clawback, recoupment, recover, executive compensation, employee pay, accounting restatement, fraud, corporate governance

JEL Classification: G32, G34, J33, M41, M52, M55