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: Suggested Citation