Clawback Policy Adoption, Corporate Risk Taking, and Investment Efficiency

• In Event: Management Accounting

Abstract

This study investigates the effectiveness of clawback provisions in executive compensation contracts to mitigate the opportunistic managerial behavior of engaging in risky investments. Since the final rules regarding clawbacks have yet to be issued by the SEC (Borges 2012), the question of their effectiveness at mitigating the risk of loss to the firm and protecting its stakeholders from management empire building or less than optimal investing decisions, is yet to be answered fully.

Using a sample of S&P 1500 firms over the period of 2005–2009, our results show that strong governance indicators, such as board independence, diligence, and audit committee size are positively associated with the firm’s adoption of a clawback policy; whereas management entrenchment (CEO duality status, CEO tenure, and ownership) is negatively associated with adoption. Using the difference-in-differences research design, we find that, after adopting a clawback policy, firms are more risk averse and investment efficiency increases.

Authors

• Yu Chen, Texas A&M International University

• Carol E Vann, University of South Alabama