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The impact of clawback provisions on executive cash compensation

Author

Listed:
  • Hanni Liu

    (Manhattan College)

  • Harrison Liu

    (The University of Texas at San Antonio)

  • Jennifer Yin

    (The University of Texas at San Antonio)

Abstract

An asymmetric payoff function exists in CEO compensation: the sensitivity between CEO cash compensation and negative stock returns is higher than that to positive stock returns. The underlying rationale for such an asymmetrical relationship is that the difficulty of the ex post settling up of cash compensation prompts boards to reduce compensation when there is bad news. In this paper, we examine firms that adopt clawback provisions and find no evidence of such an asymmetry in these firms. The finding is consistent with the clawback provision’s ex post settling up characteristics. Our paper contributes to the literature by showing that clawback provisions favorably impact the structure of CEO compensation by reducing agency costs related to the ex post settling up problem.

Suggested Citation

  • Hanni Liu & Harrison Liu & Jennifer Yin, 2023. "The impact of clawback provisions on executive cash compensation," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 35-62, July.
    • Handle: RePEc:kap:rqfnac:v:61:y:2023:i:1:d:10.1007_s11156-023-01136-5
    DOI: 10.1007/s11156-023-01136-5
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    References listed on IDEAS

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    3. Leone, Andrew J. & Wu, Joanna Shuang & Zimmerman, Jerold L., 2006. "Asymmetric sensitivity of CEO cash compensation to stock returns," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 167-192, October.
    4. Ed Dehaan & Frank Hodge & Terry Shevlin, 2013. "Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality?," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 1027-1062, September.
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    9. 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.
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    Cited by:

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    More about this item

    Keywords

    Clawback; Ex post settling up; Performance measures; Executive compensation;
    All these keywords.

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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