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The Costs and Benefits of Clawback Provisions in CEO Compensation

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  • Mark A. Chen
  • Daniel T. Greene
  • James E. Owers

Abstract

We analyze the costs and benefits of clawback provisions that enable firms to recover incentive compensation from top management if financials are restated. In a simple contracting model, we find that a clawback provision effectively lengthens the horizon of incentives and curbs misreporting. However, such a provision can add noise to the underlying performance measure, reducing managerial effort and firm value. Our empirical tests support the model’s predictions regarding which types of firms are likely to voluntarily use clawback provisions. We also document that clawback provisions are associated with higher reporting quality, greater CEO pay-for-performance sensitivity, and higher CEO compensation.

Suggested Citation

  • Mark A. Chen & Daniel T. Greene & James E. Owers, 2015. "The Costs and Benefits of Clawback Provisions in CEO Compensation," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 4(1), pages 108-154.
    • Handle: RePEc:oup:rcorpf:v:4:y:2015:i:1:p:108-154.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfu012
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    Cited by:

    1. Hanni Liu & Harrison Liu & Jennifer Yin, 2023. "The impact of clawback provisions on executive cash compensation," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 35-62, July.
    2. William D. Brink & Jonathan H. Grenier & Jonathan S. Pyzoha & Andrew Reffett, 2019. "The Effects of Clawbacks on Auditors’ Propensity to Propose Restatements and Risk Assessments," Journal of Business Ethics, Springer, vol. 158(2), pages 313-332, August.
    3. Patrick Velte, 2020. "Determinants and consequences of clawback provisions in management compensation contracts: a structured literature review on empirical evidence," Business Research, Springer;German Academic Association for Business Research, vol. 13(3), pages 1417-1450, November.
    4. Daoju Peng & Jianfu Shen & Simon Yu Kit Fung & Eddie C. M. Hui & Kwokyuen Fan, 2024. "The Valuation Effect and Consequences of Clawback Adoption in Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 68(2), pages 274-317, February.
    5. Cha, Yunshil & Gill, Susan & Wong-On-Wing, Bernard, 2023. "Clawback policy enforcement: To disclose or not to disclose," Advances in accounting, Elsevier, vol. 62(C).
    6. Josef Schroth, 2015. "Managerial Compensation Duration and Stock Price Manipulation," Staff Working Papers 15-25, Bank of Canada.
    7. Dina El Mahdy, 2020. "The unintended consequences of voluntary adoption of clawback provisions on managerial ability," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3493-3526, December.
    8. Mburu, Henry Kimani & Tang, Alex P., 2018. "The adoption of voluntary clawback provisions and the broader commitment hypothesis," Advances in accounting, Elsevier, vol. 43(C), pages 60-69.

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