Corporate Risk-Taking after Adoption of Compensation Clawback Provisions

• In Event: Management Accounting

Abstract

The adoption of clawbacks purports to mitigate harmful behavior to firms’ operation, including excessive corporate risk-taking at the expense of investors’ interests and firms’ long-term benefits. This study empirically examines whether corporate risk-taking declines after the adoption of the clawback provisions in the top executives’ compensation contracts by the publicly traded US firms. Using a sample of clawback-adopters and non-adopters in the Russell 3000 Index firms during the period 2005 to 2014, we find the presence of clawback provision is significantly associated with a lower level of corporate risk-taking reflected by firms’ investment strategies and their capital structure. Additional analyses suggest that this association is more evident for small firms and for firms audited by Big 4 auditors. Robustness checks of alternative measures for corporate risk-taking and controlling for the occurrence of financial restatements further support the main results. Overall, the results of this study indicate a generally more conservative corporate risk-taking behavior subsequent to the clawback adoption.

Authors

• Yin Liu, SUNY Brockport

• Huiqi Gan, University of Massachusetts-Lowell

• Khondkar E Karim, University of Massachusetts-Lowell