Do Compensation Clawback and Holdback Provisions Change Executive Reporting Choices?

39 Pages Posted: 13 Jul 2012

See all articles by Frank D. Hodge

Frank D. Hodge

University of Washington - Michael G. Foster School of Business

Amanda Winn

University of Kansas

Date Written: July 1, 2012

Abstract

The Dodd-Frank Act requires firms to include a clawback or holdback clause in executive compensation contracts. Using an experiment, we examine how executives react to the enforcement of these clauses after a restatement. We find that executives generally reduced the riskiness of their financial reporting choices after enforcement. An exception was executives who made relatively conservative reporting choices prior to the restatement. Amongst these executives, those covered by a clawback clause made riskier reporting choices after the restatement than those covered by a holdback clause. Theory argues and supplemental analysis supports that this effect is due to executives becoming angry when they did not feel responsible for the restatement, but were nevertheless required to physically return their bonus. Our results are important because they provide evidence about how executives react to the enforcement of a clawback or holdback clause, and where their reactions might produce unintended consequences.

Keywords: Executive compensation, clawbacks, holdbacks, Dodd-Frank Act

JEL Classification: M52, D81, M40, M41

Suggested Citation

Hodge, Frank Douglas and Winn, Amanda, Do Compensation Clawback and Holdback Provisions Change Executive Reporting Choices? (July 1, 2012). Available at SSRN: https://ssrn.com/abstract=2104205 or http://dx.doi.org/10.2139/ssrn.2104205

Frank Douglas Hodge

University of Washington - Michael G. Foster School of Business ( email )

Paccar Hall 540, Box 353200
Seattle, WA 98195-3200
United States
206-616-8598 (Phone)
206-685-9392 (Fax)

Amanda Winn (Contact Author)

University of Kansas

1415
Lawrence, KS 66045
United States

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