Management Accounting Section Midyear Meeting

Experimental Evidence on the Effect of Clawback Provision Strength and Discretion in Clawing Back Performance-Based Payment on Honesty in Reporting

• In Event: Break and Research Exhibition 1
  In Paper Session: Room 1

Abstract

Previous research on clawbacks shows that the adoption of clawbacks leads to positive effects, for example to a decrease of financial restatements, which is often used as a proxy measure for reporting quality (e. g. Chan, Chen, & Chen, 2013) or to a decrease in fraud risk (e. g. Fung, Raman, Sun, & Xu, 2015). These studies are mostly based on archival data analysis (Velte, 2020) and therefore the causality of the effect on a behavioral level is not clear, yet. The objective of our study is to provide empirical evidence on causal direct effects of clawback provisions using a behavioral experiment. Our findings show that adopting clawback provisions to the incentive system leads to significantly better – in terms of more honest – reporting behavior. Second, we find significant differences of the degree of clawback provision strength (based on the Erkens, Gan, and Yurtoglu (2018) clawback-strength-index) and third, we find a significant interaction effect between the degree of discretion that is applied while executing a clawback and the clawback strength on the honesty in reporting. Thus, our findings show that too much discretion in exercising clawbacks waters down the strength of the clawback and thus its regulatory intention. Because these findings give implications on the specific design of clawback provision and on the effect of applying discretion in the execution of clawbacks they are relevant for both regulators and practitioners.

Authors

• Müller Fabian, University of Stuttgart

• Burkhard Pedell, University of Stuttgart

• Ann Katarina Tank, Universität Stuttgart