Clawback Enforcement Heterogeneity and the Horizon of Executive Pay: Empirical Evidence

41 Pages Posted: 27 Dec 2022 Last revised: 29 May 2024

Date Written: December 13, 2022

Abstract

We provide empirical tests to evaluate the impact of clawback enforcement heterogeneity on the horizon of executive compensation. Clawback provisions entitle shareholders to recover previously-awarded incentive compensation after the discovery of accounting manipulation or misconduct. We deal with the endogeneity of clawback adoption decisions through an instrumental variables strategy that exploits the transmission of governance choices within firms' networks. We corroborate that clawback adoption reduces the frequency of accounting manipulation, but this reduction is accompanied by heterogeneous effects on the horizon of executive pay across firms. Clawback adopters with high director independence, high leverage, high managerial termination payments, and low executive ownership tilt their compensation towards the short-term. The results suggest that clawbacks allow strong-enforcement firms to tilt compensation towards the short-term, offsetting some of the direct manipulation disincentives generated by the clawback.

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

JEL Classification: D86, G34, J33, K41

Suggested Citation

Remesal, Alvaro, Clawback Enforcement Heterogeneity and the Horizon of Executive Pay: Empirical Evidence (December 13, 2022). Available at SSRN: https://ssrn.com/abstract=4301037 or http://dx.doi.org/10.2139/ssrn.4301037

Alvaro Remesal (Contact Author)

CUNEF Universidad ( email )

Calle de los Pirineos 55
Madrid, 28040
Spain

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