Firm-Initiated Clawback Provisions and Insider Trading
49 Pages Posted: 3 Feb 2020 Last revised: 16 Sep 2022
Date Written: January 10, 2020
This paper investigates the causal effect of firm-initiated compensation clawback provisions on the profitability of insider trading. We find that clawback provisions reduce the ability of insiders to generate profits from their trades, especially insider sales, based on their information advantage. However, this effect is not associated with prior information asymmetry conditions as the literature suggests. Instead, our evidence suggests that firm-initiated clawback provisions prevent firm insiders from extracting wealth relative to other market participants. Overall, our findings suggest that clawback provisions are effective in preventing insiders from withholding value-relevant information to trade gainfully.
Keywords: Clawback provisions, Insider trades, Insider trading profitability, Information asymmetry
JEL Classification: G14
Suggested Citation: Suggested Citation