Not All Clawbacks are the Same: Consequences of Deterrent vs. Non-Deterrent Clawback Provisions

• In Event: Governance and regulatory issues

Abstract

Little is known about the structure, design and effectiveness of clawback provisions across firms. We construct a Deterrent Index based on a comprehensive linguistic analysis of 4,464 provisions to quantify the deterrent level embedded in executive contracts. The index intends to capture the central elements of a clawback policy as proposed by the Securities and Exchange Commission (SEC) pursuant to Dodd-Frank Section 954. Using this index we report a significantly lower incidence of accounting misstatements and restatements only for firms that adopt a high deterrent clawback policy, but not otherwise. We also document that the intensity of provisions is correlated with a shift towards cash pay, indicating risk alignment between managers and shareholders. Finally, we document a decrease in the likelihood for CEO turnovers after firms adopt high deterrent clawbacks. Our results indicate that the effectiveness of clawbacks depends on their structure and deterrence level, but not on their mere adoption. We add to the current debate on clawback regulation and provide insights on the design and consequences of clawback policies.

Authors

• Ying Gan, Erasmus Universiteit Rotterdam

• Burcin Yurtoglu, WHU

• Michael H. R. Erkens, Erasmus University Rotterdam