Clawback Provisions and Firm Risk

Fisher College of Business Working Paper No. 2019-03-013

Charles A. Dice Center Working Paper No. 2019-13

62 Pages Posted: 3 May 2019

See all articles by Ilona Babenko

Ilona Babenko

Arizona State University

Benjamin Bennett

Tulane University - A.B. Freeman School of Business

John M. Bizjak

Texas Christian University

Jeffrey L. Coles

University of Utah - Department of Finance; Arizona State University (ASU) - Finance Department

Jason Sandvik

University of Utah

Date Written: April 30, 2019

Abstract

Panel OLS and GMM-IV estimates indicate that executives respond to the adoption of a compensation clawback provision by decreasing firm risk. The mechanisms that transmit incentives to decisions and decisions to risk appear to be more conservative investment and financial policies and preemptive management of ESG, legal, and cyberattack risks. The stock market reaction to the announcement of a clawback adoption, as well as post-adoption stock and accounting performance, are significantly and positively related to the actual and predicted reduction in firm risk. The reduction in firm risk, arising from adoption of a clawback policy, appears to benefit shareholders.

Keywords: Clawback, recoupment, recover, executive compensation, employee pay, accounting restatement, fraud, corporate governance

JEL Classification: G32, G34, J33, M41, M52, M55

Suggested Citation

Babenko, Ilona and Bennett, Benjamin and Bizjak, John M. and Coles, Jeffrey L. and Sandvik, Jason, Clawback Provisions and Firm Risk (April 30, 2019). Charles A. Dice Center Working Paper No. 2019-13. Available at SSRN: https://ssrn.com/abstract=3382498 or http://dx.doi.org/10.2139/ssrn.3382498

Ilona Babenko

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Benjamin Bennett (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

HOME PAGE: https://sites.google.com/site/benjaminbennettfinance/home

John M. Bizjak

Texas Christian University ( email )

Fort Worth, TX 76129
United States
817-257-4260 (Phone)

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-4475 (Phone)
480-965-8539 (Fax)

Jason Sandvik

University of Utah

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