The Value Implications of Mandatory Clawback Provisions

Abstract

We examine the stock market reaction to the announcement of an SEC proposal to make clawback provisions mandatory. The SEC’s proposed rules were significantly stronger than existing clawback provisions that many firms had voluntarily adopted. We find that firms without a clawback provision exhibited positive abnormal returns of 0.6% in a 5-day window around the announcement of the proposed rule. Firms with a clawback provision did not exhibit statistically significant abnormal announcement returns. The announcement’s impact is strongest for firms with more powerful management. Our findings suggest that the mandatory clawbacks are value-enhancing on average.