Clawback Enforcement, Executive Pay, and Accounting Manipulation
81 Pages Posted: 1 Oct 2018 Last revised: 17 Jul 2019
Date Written: May 3, 2019
Clawback provisions entitle shareholders to recover previously-awarded incentive compensation from managers involved in accounting manipulation or misconduct. I study theoretically and empirically the impact of clawback provisions on the horizon of executive pay in the presence of enforcement frictions. In a principal-agent model I show how, to deter manipulation, (i) clawback adoption substitutes for long-term pay when enforcement is strong, and (ii) clawback adoption can complement long-term pay when enforcement is weak. Empirical tests using samples of propensity-score matched firms support the predictions. Weak enforcement hinders the effectiveness of clawbacks, but firms can optimally complement them by lengthening the pay horizon.
Keywords: Clawback, Executives, Governance, Compensation, Accounting Manipulation, Litigation
JEL Classification: D86, G34, J33, K41
Suggested Citation: Suggested Citation