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Corporate risk-taking after adoption of compensation clawback provisions

Author

Listed:
  • Yin Liu

    (State University of New York College at Brockport)

  • Huiqi Gan

    (University of Massachusetts Lowell)

  • Khondkar Karim

    (University of Massachusetts Lowell)

Abstract

The adoption of clawbacks purports to mitigate harmful behavior to firms’ operation, including excessive corporate risk-taking at the expense of investors’ interests and firms’ long-term benefits. This study empirically examines whether corporate risk-taking declines after the adoption of clawback provisions in the compensation contracts of top executives in publicly traded US firms. Using a sample of clawback adopters and non-adopters in the Russell 3000 Index firms during the period 2005–2014, we find that the presence of clawback provisions is significantly associated with a lower level of corporate risk-taking as reflected by firms’ investment strategies and their capital structure. Additional analyses suggest that this association is stronger for small firms and for firms audited by Big 4 auditors. Robustness checks of using alternative measures for corporate risk-taking, controlling for the occurrence of financial restatements, board independence, and internal control quality, and employing a propensity matching score matching sample further support the main results. Overall, the results of this study indicate more conservative corporate risk-taking behavior after the adoption of clawbacks.

Suggested Citation

  • Yin Liu & Huiqi Gan & Khondkar Karim, 2020. "Corporate risk-taking after adoption of compensation clawback provisions," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 617-649, February.
    • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:2:d:10.1007_s11156-019-00801-y
    DOI: 10.1007/s11156-019-00801-y
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    Cited by:

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    5. David Hillier & Patrick McColgan & Athanasios Tsekeris, 2022. "How did the Sarbanes–Oxley Act affect managerial incentives? Evidence from corporate acquisitions," Review of Quantitative Finance and Accounting, Springer, vol. 58(4), pages 1395-1450, May.

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    More about this item

    Keywords

    Clawback; Risk-taking; Investment policies; Compensation; Firm size; External auditor;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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