Clawback Provisions, Executive Pay, and Accounting Manipulation

CEMFI Working Paper 1808

80 Pages Posted: 1 Oct 2018 Last revised: 14 Oct 2018

Date Written: October 9, 2018


Clawback provisions allow shareholders to recover previously-awarded incentive compensation from managers involved in accounting manipulation or misconduct. In a principal-agent model I show how, with clawback enforcement frictions, clawback adoption can tilt the optimal compensation schedule towards the long-term. I test the relevance of this implication using data from U.S. public firms in the 2002-2016 period. The identification deals with the endogenous timing of adoption and measurement error by exploiting variation in clawback adoption across a firm's board interlock. In those firms with weak monitoring, clawback adoption increases the wealth-performance sensitivity of unvested (long-term) compensation, while reduces the frequency of earnings manipulation. The results suggest that enforcement frictions hinder the effectiveness of clawbacks, but firms complement them with alternative incentive contracts.

Keywords: Clawback, Executives, Governance, Compensation, Accounting Manipulation

JEL Classification: D86, G34, J33

Suggested Citation

Remesal, Alvaro, Clawback Provisions, Executive Pay, and Accounting Manipulation (October 9, 2018). CEMFI Working Paper 1808. Available at SSRN: or

Alvaro Remesal (Contact Author)

CUNEF ( email )

Leonardo Prieto Castro 2
Madrid, 28040

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