Voluntary Clawback Provisions and Executive Risk-taking

• In Event: Emerging Research and Research Interaction 5

Abstract

Clawback provisions have been defined as corporate governance mechanisms intended to reduce executive risk-taking and deter opportunistic behavior. Though voluntary clawback provisions have been associated with several positive consequences in extant literature, there is little empirical evidence of their effect on executive risk-taking and opportunistic behavior. On the contrary, recent clawback research shows that clawback firms engage more in real activities earnings management suggesting increasing risk-taking behavior in clawback firms. Additionally, there is a need to better understand the consequences of voluntary clawback adoption as the debate on mandatory clawback provisions for all publicly traded companies in the U.S. rages on. In this study, in which we focus on voluntary restatement triggered clawback provisions, we examine whether clawback adoption leads to changes in executives’ risk-taking behavior and how that impacts the output from innovative activities; investment in innovative activities depend on the firm’s corporate risk policy. We use a difference-in-difference research design on a propensity score-matched sample of 418 firms for the period 2010-2013. Our findings are consistent with more risk-averse executives’ in clawback firms compared to those in non-clawback firms. We also find that this executive risk-averseness is associated with astute application of real activities manipulation to both meet short-term and long-term firm goals; this results in higher innovative output in clawback firms compared to non-clawback firms.

Authors

• Henry Mburu, Morgan State University

• Alex Tang, Morgan State University