M&A Decisions and the Voluntary Adoption of Clawback Provisions in Executive Compensation Contract

• In Event: Executive Compensation and Investment Activities

Abstract

This study examines whether firms’ M&A decisions influence the likelihood of voluntary adoption of clawback provisions in executive compensation contracts, and if so, whether clawback adoption improves executives’ subsequent decision-making in M&As. Because prior research finds that poor M&A decisions are associated with future earnings restatements, we predict that firms are more likely to adopt clawback provisions after these transactions. We further conjecture that M&A decisions will improve after clawback adoption, as the presence of a clawback provision limits the executives’ ability to manipulate post-acquisition earnings. Consistent with our expectations, we find that (1) firms with more negative announcement returns from M&As are more likely to adopt a clawback provision; (2) firms that acquire targets with relatively poor accounting quality are more likely to adopt a clawback provision; (3) clawback provisions improve investor perception of the quality of M&A transactions; and (4) executives are more likely to “listen” to the market when deciding whether to complete a transaction if their compensation contracts include a clawback provision. These results suggest that boards take a pro-active approach and consider the factors that may lead to restatements when deciding whether to adopt clawback provisions. Our results have implications for policymakers as they attempt to regulate the ability of executives to extract rents from shareholders through the provisions of the Dodd-Frank Act (2010).

Authors

• Anna Bergman Brown, Idaho State University

• Paquita Davis-Friday, Baruch College–CUNY

• Lale Guler, Koç Üniversitesi

• Carol Marquardt, Baruch College–CUNY