Clawback Adoptions, Managerial Compensation Incentives, Capital Investment Mix and Efficiency

55 Pages Posted: 27 Sep 2017 Last revised: 16 Sep 2020

See all articles by Gary C. Biddle

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics; Columbia Business School; HKU Business School; London Business School

Lilian H. Chan

The University of Hong Kong

Jeong Hwan Joo

Ulsan National Institute of Science and Technology (UNIST)

Date Written: September 13, 2020

Abstract

We present evidence that managerial responses to voluntary clawback adoptions
depend on compensation incentives that can induce capital investment mix shifts and reduce
capital investment efficiency. Specifically, we find that managers incentivized by high levels of
performance-based pay and equity-linked compensation respond to clawback adoptions by shifting
capital investments away from R&D and toward capex, thereby lowering capital investment
efficiency and contravening purported financial reporting quality and investment efficiency
benefits found previously for clawback adoptions. These findings, which are robust to alternative
explanations, extend prior evidence by documenting managerial compensation incentives as a
channel by which clawback adoptions can influence capital investment mix and capital investment
efficiency. These findings are also timely given pending SEC Rule 10D-1 that would make
clawback provisions a pre-condition for U.S. exchange listing and which explicitly requests
“comment on any effect the proposed requirements may have on efficiency, competition and
capital formation” (SEC 2015, 103-104).

Keywords: compensation clawback provisions; capital investment mix; performance-based pay; equity incentives; real effects; capital investment efficiency

JEL Classification: G18, G30, M41, M48

Suggested Citation

Biddle, Gary C. and Chan, Lilian H. and Joo, Jeong Hwan, Clawback Adoptions, Managerial Compensation Incentives, Capital Investment Mix and Efficiency (September 13, 2020). Available at SSRN: https://ssrn.com/abstract=3042973 or http://dx.doi.org/10.2139/ssrn.3042973

Gary C. Biddle (Contact Author)

University of Melbourne - Faculty of Business and Economics ( email )

Level 8, Dept of Accounting
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Columbia Business School ( email )

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HKU Business School ( email )

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London Business School ( email )

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Lilian H. Chan

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Jeong Hwan Joo

Ulsan National Institute of Science and Technology (UNIST) ( email )

gil 50
Ulsan, 689-798
Korea, Republic of (South Korea)

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