A Study on the Association between Managerial Ability and Real Earnings Management among Clawback Voluntary Adopters

• In Event: Public Interest

Abstract

The SEC is currently working on the final guidelines of Rule 10D-1 related to mandated clawback adoptions among U.S. public issuers. The main purpose of this study is to examine whether managerial abilities is a key determinant in the decision to voluntarily adopt clawback and whether able managers among clawback adopters are associated with less real earnings management. We aspire to quantify how much of the observed variations to the firm’s financial reporting quality can be attributed to the interaction between management’s fixed effect and the decision to voluntarily adopt clawback provisions. Using a propensity scores matched sample of firms that adopted and did not adopt voluntary clawback between 2007 and 2013, we find a significantly positive association between managerial ability and the decision to voluntarily adopt clawback. Moreover, we find a significantly negative association between managerial ability and real earnings management among clawback adopters. Our results highlight the importance of the SEC’s efforts to enforce the clawback policies in a manner that would limit opportunistic behavior among non-clawback firms.

Authors

• Dina F El Mahdy, Morgan State University

• Henry Kimani Mburu, The Catholic University of Eastern Africa

• Alex Tang, Morgan State University