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 make clawback provisions mandatory. The proposed rules were significantly stronger than existing clawback provisions that many firms had voluntarily adopted. We find that firms without a clawback provision experienced positive abnormal returns of 0.6% in a 3-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.