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The Economics of Deferral and Clawback Requirements

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  • FLORIAN HOFFMANN
  • ROMAN INDERST
  • MARCUS OPP

Abstract

We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting incentive compensation of material risk‐takers in the financial sector. Moderate deferral requirements have a robustly positive effect on risk‐management effort only if the bank manager's outside option is sufficiently high; otherwise, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. Our normative analysis characterizes whether and how deferral and clawback requirements should supplement capital regulation as part of the optimal policy mix.

Suggested Citation

  • Florian Hoffmann & Roman Inderst & Marcus Opp, 2022. "The Economics of Deferral and Clawback Requirements," Journal of Finance, American Finance Association, vol. 77(4), pages 2423-2470, August.
    • Handle: RePEc:bla:jfinan:v:77:y:2022:i:4:p:2423-2470
    DOI: 10.1111/jofi.13160
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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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