The Value Implications of Mandatory Clawback Provisions

Abstract

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 clawback provisions 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, firms without a clawback provision experienced positive abnormal returns. Furthermore, the announcement had the greatest positive impact on firms without a clawback with more powerful managers. Our findings suggest that clawbacks are value-enhancing, but powerful managers may resist their adoption, which is why regulation mandating clawbacks may be necessary.