46 Pages Posted: 28 Dec 2016 Last revised: 19 Apr 2017
Date Written: December 27, 2016
Performance-based compensation can give managers an incentive to misreport financial information. This incentive can be mitigated by requiring the recoupment of erroneously awarded performance-based compensation from executives, which is known as a clawback provision. We study the value implications of having a clawback provision by examining the stock market’s reaction to the SEC’s announcement of proposed Rule 10D-1 that mandates clawback provisions. We find that relative to firms that had voluntarily adopted a clawback provision prior to the SEC’s announcement, firms that did not have a clawback provision experienced positive abnormal returns, suggesting that clawback provisions are value-enhancing. Furthermore, the announcement had the greatest positive impact on firms without a clawback with more powerful managers. Our findings suggest that clawbacks create a valuable disincentive to misreport information, but that despite this, powerful managers may resist their adoption, which is why regulation mandating clawbacks may be necessary.
Suggested Citation: Suggested Citation
Bakke, Tor-Erik and Mahmudi, Hamed and Virani, Aazam, Do Clawbacks Have Claws? The Value Implications of Mandatory Clawback Provisions (December 27, 2016). Available at SSRN: https://ssrn.com/abstract=2890578