Management Accounting Section Midyear Meeting

Where are the Clawbacks?

• In Event: Performance Pressure

Abstract

We examine the propensity of firms to claw back executive compensation after a restatement. We find that despite thousands of restatements from 2004-2019, firms almost never use this important governance mechanism. However, in the few instances when clawbacks do happen, they are associated with alleged misconduct, severe restatements, and the presence of a clawback policy at the firm. The SEC has also enforced only a few compensation clawbacks, which has provided weak stimuli for firms to enforce more clawbacks. We also find that firms appear to use CEO or CFO dismissal as a substitute governance mechanism instead of clawbacks. Lastly, we investigate a consequence of the lack of clawback enforcement: the attenuation of the benefits of clawback policy adoption. Specifically, we find the financial reporting quality improvements firms experience after clawback policy adoption diminish within a few years, consistent with executives learning that clawback policies have no teeth.

Authors

• Dane M. Christensen, University of Oregon

• Lance Gabrielsen, University of Oregon

• Kyle M. Peterson, University of Oregon