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The effects of firm-initiated clawback provisions on earnings quality and auditor behavior

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  • Chan, Lilian H.
  • Chen, Kevin C.W.
  • Chen, Tai-Yuan
  • Yu, Yangxin
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    Abstract

    While firm-initiated compensation recovery (or clawback) provisions are gaining popularity and the recently enacted Dodd-Frank Act seeks to make the clawback of erroneously awarded compensation mandatory for all listed companies, little is known about their effectiveness. We find that the incidence of accounting restatements declines after firms initiate such provisions. In addition, we show that investors and auditors view such provisions as associated with increased accounting quality and lower audit risk. Specifically, we find that firms' earnings response coefficients increase after the adoption of clawback provisions. Further, for firms that adopt clawbacks, auditors are less likely to report material internal control weaknesses, charge lower audit fees, and issue audit reports with a shorter lag.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 54 (2012)
    Issue (Month): 2 ()
    Pages: 180-196

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    Handle: RePEc:eee:jaecon:v:54:y:2012:i:2:p:180-196

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Clawbacks; Accounting restatements; The Dodd-Frank Act; Audit risk; Audit fees;

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    References

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    Citations

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    Cited by:
    1. Chan, Lilian H. & Chen, Kevin C.W. & Chen, Tai-Yuan, 2013. "The effects of firm-initiated clawback provisions on bank loan contracting," Journal of Financial Economics, Elsevier, vol. 110(3), pages 659-679.
    2. Denis, Diane K., 2012. "Mandatory clawback provisions, information disclosure, and the regulation of securities markets," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 197-200.
    3. Francis, Bill & Hasan, Iftekhar & Park, Jong Chool & Wu, Qiang, 2014. "Gender differences in financial reporting decision-making: Evidence from accounting conservatism," Research Discussion Papers 1/2014, Bank of Finland.

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