Does Investment Efficiency Improve after the Adoption of Compensation Clawback Provisions?

• In Event: Even More Financial Reporting

Abstract

In this study, we examine whether the adoption of clawbacks improves the investment efficiency by reducing corporate over-investments. The adoption of clawback provisions in the top executives’ compensation contracts purports to mitigate harmful behavior to firms’ operation, such as the over-investments at the expense of investors’ interests and firms’ long-term benefits. Consistent with this prediction, we find that the presence of clawback provision is significantly associated with a decreased level of corporate over-investments. Robustness checks of using alternative investment measures and propensity-score matched sample provide further support to this main finding. Overall, we find empirical evidence that indicates an improved corporate investment efficiency subsequent to the clawback adoption.

Authors

• Yin Liu, university of massachusetts-lowell

• Huiqi Gan, University of Massachusetts Lowell

• Khondkar E Karim, University of Massachusetts-Lowell