Corporate Risk-taking after Adoption of Compensation Clawback Provisions

• In Event: Risk-Taking and Risk Management

Abstract

The adoption of clawbacks purports to mitigate harmful behavior to firms’ operation, including excessive corporate risk-taking at the expense of investors’ interests and firms’ long-term benefits. This study empirically examines whether corporate risk-taking declines after the adoption of the clawback provisions in the top executives’ compensation contracts by the publicly traded US firms. We find the presence of clawback provision is significantly associated with a lower level of corporate risk-taking reflected by firms’ investment strategies and their capital structure. Additional analyses suggest that this association is more evident for small firms and for firms audited by Big 4 auditors. Overall, the results of this study indicate a generally more conservative corporate risk-taking behavior 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