The Value Implications of Mandatory Clawback Provisions

Abstract

We find evidence suggesting that mandatory clawback provisions are value-enhancing. We examine the stock market reaction to the SEC’s announcement of a proposed rule 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 exhibited positive abnormal returns of 0.6% around the announcement of the proposed rule. Firms with a clawback provision did not exhibit statistically significant abnormal announcement returns. The announcement’s return is most positive for firms without clawbacks that have more powerful management.

Keywords: clawback provisions, corporate governance, executive compensation, financial restatements, regulation