The Value Implications of Mandatory Clawback Provisions

Abstract

We study the value implications of clawback provisions by examining the stock market’s reaction to an SEC proposal to mandate clawbacks. We find that firms without a clawback provision experienced positive abnormal returns around the announcement, relative to firms with an existing clawback provision. The announcement’s impact is strongest for firms with more powerful management. Our findings suggest that clawbacks are value-enhancing, but may be resisted by powerful managers, which is why regulation mandating clawbacks may be necessary. These findings are particularly topical given the current efforts to roll-back the proposed clawback rules as well as governance regulation more generally.