M&A Decisions and US Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts

35 Pages Posted: 26 Feb 2015

See all articles by Anna Bergman Brown

Anna Bergman Brown

University of Connecticut - Department of Accounting

Paquita Y. Davis-Friday

Zicklin School of Business; City University of New York - Stan Ross Department of Accountancy

Lale Guler

University of Texas at Dallas - Department of Accounting & Information Management

Carol A. Marquardt

City University of New York (CUNY) – Baruch College

Date Written: January/February 2015

Abstract

We examine whether US firms’ M&A decisions influence the likelihood of voluntary adoption of clawback provisions in executive compensation contracts and whether clawback adoption improves subsequent M&A decisions. Because prior research finds that poor M&A decisions are associated with future earnings restatements, we predict that clawback adoption is more likely after these transactions. We further conjecture that M&A decisions will improve after clawback adoption, as its presence reduces executives’ willingness to manipulate post‐acquisition earnings. Consistent with our expectations, we find that (1) firms with more negative M&A announcement returns are more likely to adopt clawbacks; (2) firms that acquire targets with relatively poor accounting quality are more likely to adopt clawbacks; (3) clawbacks improve investor perception of M&A quality; and (4) executives are more responsive to the market when completing M&A deals if their compensation contracts include clawbacks. These results suggest that boards take a pro‐active approach and consider factors that may lead to restatements when adopting clawbacks. Our results have implications for US policymakers, as the Dodd‐Frank Act of 2010 requires mandatory adoption of clawbacks. Our results also suggest that non‐US firms can reduce managerial incentives to manipulate post‐takeover earnings by using clawbacks.

Keywords: mergers & acquisitions, clawback provisions, restatements

Suggested Citation

Brown, Anna Bergman and Davis-Friday, Paquita Y. and Guler, Lale and Marquardt, Carol, M&A Decisions and US Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts (January/February 2015). Journal of Business Finance & Accounting, Vol. 42, Issue 1-2, pp. 237-271, 2015. Available at SSRN: https://ssrn.com/abstract=2570635 or http://dx.doi.org/10.1111/jbfa.12111

Anna Bergman Brown (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Paquita Y. Davis-Friday

Zicklin School of Business ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States
646-312-3048 (Phone)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3048 (Phone)
646-312-3161 (Fax)

Lale Guler

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

Carol Marquardt

City University of New York (CUNY) – Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3241 (Phone)

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