Can Shareholders Be at Rest After Adopting Clawback Provisions? Evidence from Stock Price Crash Risk

58 Pages Posted: 16 Nov 2014 Last revised: 6 Jul 2017

See all articles by Dichu Bao

Dichu Bao

Hong Kong Polytechnic University

Simon Fung

Deakin University

Lixin (Nancy) Su

Department of Accountancy, Lingnan University

Date Written: April 1, 2017

Abstract

Using a propensity-score matched sample and a difference-in-differences research design, we find that stock price crash risk increases after a firm voluntarily incorporates clawback provisions in executive officers’ compensation contracts. This heightened crash risk is concentrated in adopters who increase upward real activities-based earnings management and those who reduce the readability of 10-K reports. Based on cross-sectional analyses, we also find that the increased crash risk is more pronounced for adopters with high ex-ante fraud risk, low managerial ability, high CEO equity incentives, and low dedicated institutional ownership. Collectively, our results suggest that the clawback adoption per se does not curb managerial opportunism but rather induces managers to use alternative channels for concealing bad news, which may contribute to a greater stock price crash risk; and the increase in crash risk is more likely in cases where incentives are strong or monitoring is weak. Our results should be of interest to regulators and policy makers considering the effects of clawback adoption on the investing public.

Suggested Citation

Bao, Dichu and Fung, Simon and Su, Lixin (Nancy), Can Shareholders Be at Rest After Adopting Clawback Provisions? Evidence from Stock Price Crash Risk (April 1, 2017). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2519401 or http://dx.doi.org/10.2139/ssrn.2519401

Dichu Bao (Contact Author)

Hong Kong Polytechnic University ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong

Simon Fung

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria
Australia

Lixin (Nancy) Su

Department of Accountancy, Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

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