Clawback Policy Enforcement: To Disclose or Not to Disclose

• In Event: 2.02 Investor Reactions to Management Disclosures

Abstract

The SEC (Securities and Exchange Commission) proposed in 2015 to require the disclosure of incentive compensation recovery efforts by the board of directors. We hypothesize and find evidence that clawback enforcement disclosure moderates the effect of misstatement intentionality on investors’ willingness to invest. Results of our moderated mediation analysis suggest the following. When the board of directors does not disclose it recouped erroneously awarded bonuses, investors who perceive the misstatement to be intentional perceive weak corporate governance, leading them to be less willing to invest. This mediation effect is not as significant when the board of directors discloses it recouped erroneously awarded bonuses. Overall, our results suggest that investors penalize clawback adopters that do not disclose they exercised clawback policy, but do not reward clawback adopters that disclose clawbacks of incentive compensation. Our study provides insights into the potential effect of the SEC’s 2015 proposal requiring the disclosure of clawback enforcement.

Authors

• Yunshil Cha, Washington State University

• Susan Gill, Washington State University

• Bernard Wong-On-Wing, Washington State University