Do Compensation Clawback and Holdback Provisions Change Executive Reporting Choices?

• In Event: Doctoral Interchange Session #3 (Friday morning)
  In Paper Session: Doctoral Interchange Session #3 (Friday Morning)

Abstract

The Dodd-Frank Act requires firms to include a clawback or holdback clause in executive compensation contracts. Using an experiment, we examine how executives react to the enforcement of these clauses after a restatement. We find that executives generally reduced the riskiness of their financial reporting choices after enforcement. An exception was executives who made relatively conservative reporting choices prior to the restatement. Amongst these executives, those covered by a clawback clause made riskier reporting choices after the restatement than those covered by a holdback clause. Theory argues and supplemental analysis supports that this effect is due to executives becoming angry when
they did not feel responsible for the restatement, but were nevertheless required to physically return their bonus. Our results are important because they provide evidence about how
executives react to the enforcement of a clawback or holdback clause, and where their reactions might produce unintended consequences.

Authors

• Frank Hodge, University of Washington

• Amanda Michelle Winn, University of Washington