Joint Meeting of the Mid-Atlantic and Northeast Regions

Clawback Enforcement Disclosure: To Disclose or Not to Disclose

• In Event: Accounting and Organizations

Abstract

The SEC proposed in 2015 to require the disclosure of incentive compensation recovery efforts by companies’ boards of directors. While such disclosure can signal the effectiveness of corporate governance as the SEC intended, firms have argued that the proposed disclosure may harm executives’ reputation regardless of their involvement in misstatement because the clawback includes a no-fault clause. Results of our experimental study suggest that when the board does not disclose its clawback enforcement, investors perceive weak corporate governance, particularly when a restatement results from an intentional misstatement. This in turn leads the investors to be less willing to invest than when clawback enforcement is disclosed. We also find that investors’ perception of management reputation is not negatively affected following the board’s clawback enforcement disclosure. Overall, our study provides insights into the potential effect of the SEC’s proposal requiring the disclosure of clawback enforcement and addresses concerns raised in comment letters.

Authors

• Yunshil Cha, University of New Hampshire

• Susan Gill, Washington State University

• Bernard Wong-On-Wing, Washington State University