IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v91y2025ics0929119925000112.html
   My bibliography  Save this article

Clawback adoptions and institutional investment decisions

Author

Listed:
  • Cheung, Kwok Tong Samuel
  • Fung, Simon Yu Kit
  • Raman, K.K.
  • Shen, Jianfu

Abstract

We examine whether voluntary adoptions of clawback (executive compensation recovery) provisions are followed by changes in market outcomes, specifically changes in institutional investment decisions. Institutional investors dominate the US capital markets and are generally viewed as informed investors. Using difference-in-differences (DID) research design, we find that clawback adoptions are followed by a decrease (increase) in transient (dedicated) institutional investors' equity holdings. Our findings are robust to both level and change specifications. Also, the decrease (increase) in holdings for transient (dedicated) investors is stronger for adopters who display reduced information asymmetry (increase in long-term orientation) following clawback adoption. The results are robust to several tests for endogeneity and alternative specifications. Collectively, our findings suggest that clawback adoptions make the firm potentially less attractive to transient institutions and more desirable to dedicated institutions. Our findings have implications for clawback adoptions that are now mandatory for all US public companies with an effective date (most recently) of December 1, 2023.

Suggested Citation

  • Cheung, Kwok Tong Samuel & Fung, Simon Yu Kit & Raman, K.K. & Shen, Jianfu, 2025. "Clawback adoptions and institutional investment decisions," Journal of Corporate Finance, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:corfin:v:91:y:2025:i:c:s0929119925000112
    DOI: 10.1016/j.jcorpfin.2025.102743
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0929119925000112
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcorpfin.2025.102743?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Mohammad (Vahid) Irani & Hugh Hoikwang Kim, 2023. "The consequences of non‐trading institutional investors," Financial Management, Financial Management Association International, vol. 52(3), pages 433-481, September.
    2. Jeff L. McMullin & Brian P. Miller & Brady J. Twedt, 2019. "Increased mandated disclosure frequency and price formation: evidence from the 8-K expansion regulation," Review of Accounting Studies, Springer, vol. 24(1), pages 1-33, March.
    3. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
    4. Hollis Ashbaugh‐Skaife & Daniel W. Collins & William R. Kinney Jr & Ryan Lafond, 2009. "The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 47(1), pages 1-43, March.
    5. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 229-259.
    6. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(1), pages 25-46, January.
    7. Xuemin (Sterling) Yan & Zhe Zhang, 2009. "Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?," The Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 893-924, February.
    8. Ilona Babenko & Benjamin Bennett & John M Bizjak & Jeffrey L Coles & Jason J Sandvik, 2023. "Clawback Provisions and Firm Risk," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(2), pages 191-239.
    9. JOSEPH A. McCAHERY & ZACHARIAS SAUTNER & LAURA T. STARKS, 2016. "Behind the Scenes: The Corporate Governance Preferences of Institutional Investors," Journal of Finance, American Finance Association, vol. 71(6), pages 2905-2932, December.
    10. Richard W. Sias, 2004. "Institutional Herding," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 165-206.
    11. Alan D. Crane & Sébastien Michenaud & James P. Weston, 2016. "Editor's Choice The Effect of Institutional Ownership on Payout Policy: Evidence from Index Thresholds," The Review of Financial Studies, Society for Financial Studies, vol. 29(6), pages 1377-1408.
    12. Mark Lang & Karl V. Lins & Mark Maffett, 2012. "Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 50(3), pages 729-774, June.
    13. Giannetti, Mariassunta & Zhao, Mengxin, 2019. "Board Ancestral Diversity and Firm-Performance Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(3), pages 1117-1155, June.
    14. Lesmond, David A & Ogden, Joseph P & Trzcinka, Charles A, 1999. "A New Estimate of Transaction Costs," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1113-1141.
    15. Fung, Simon Yu Kit & Raman, K.K. & Zhu, Xindong (Kevin), 2017. "Does the PCAOB international inspection program improve audit quality for non-US-listed foreign clients?," Journal of Accounting and Economics, Elsevier, vol. 64(1), pages 15-36.
    16. Dichu Bao & Simon Yu Kit Fung & Lixin (Nancy) Su, 2018. "Can Shareholders Be at Rest after Adopting Clawback Provisions? Evidence from Stock Price Crash Risk," Contemporary Accounting Research, John Wiley & Sons, vol. 35(3), pages 1578-1615, September.
    17. Edelen, Roger M. & Ince, Ozgur S. & Kadlec, Gregory B., 2016. "Institutional investors and stock return anomalies," Journal of Financial Economics, Elsevier, vol. 119(3), pages 472-488.
    18. Fu, Renhui & Kraft, Arthur & Zhang, Huai, 2012. "Financial reporting frequency, information asymmetry, and the cost of equity," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 132-149.
    19. Rajgopal, Shiva & Venkatachalam, Mohan, 2011. "Financial reporting quality and idiosyncratic return volatility," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 1-20, February.
    20. Chan, Lilian H. & Chen, Kevin C.W. & Chen, Tai-Yuan & Yu, Yangxin, 2012. "The effects of firm-initiated clawback provisions on earnings quality and auditor behavior," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 180-196.
    21. Brian J. Bushee, 2001. "Do Institutional Investors Prefer Near†Term Earnings over Long†Run Value?," Contemporary Accounting Research, John Wiley & Sons, vol. 18(2), pages 207-246, June.
    22. Andrey Golubov & Theodosia Konstantinidi, 2019. "Where Is the Risk in Value? Evidence from a Market‐to‐Book Decomposition," Journal of Finance, American Finance Association, vol. 74(6), pages 3135-3186, December.
    23. Field, Laura Casares & Lowry, Michelle, 2009. "Institutional versus Individual Investment in IPOs: The Importance of Firm Fundamentals," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(3), pages 489-516, June.
    24. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    25. Rajgopal, Shiva & Venkatachalam, Mohan, 2011. "Financial reporting quality and idiosyncratic return volatility," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 1-20.
    26. Bin Ke & Kathy Petroni, 2004. "How Informed Are Actively Trading Institutional Investors? Evidence from Their Trading Behavior before a Break in a String of Consecutive Earnings Increases," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 42(5), pages 895-927, December.
    27. Kyung, Hangsoo & Lee, Hakyin & Marquardt, Carol, 2019. "The effect of voluntary clawback adoption on non-GAAP reporting," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 175-201.
    28. Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September.
    29. 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.
    30. Bushee, BJ & Noe, CF, 2000. "Corporate disclosure practices, institutional investors, and stock return volatility," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 38, pages 171-202.
    31. Hanqing “Chevy” Fang & Esra Memili & James J. Chrisman & Linjia Tang, 2021. "Narrow‐Framing and Risk Preferences in Family and Non‐Family Firms," Journal of Management Studies, Wiley Blackwell, vol. 58(1), pages 201-235, January.
    32. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 54(2), pages 525-622, May.
    33. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    34. Brian J. Bushee & Theodore H. Goodman, 2007. "Which Institutional Investors Trade Based on Private Information About Earnings and Returns?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 45(2), pages 289-321, May.
    35. Caroline Flammer & Pratima Bansal, 2017. "Does a long-term orientation create value? Evidence from a regression discontinuity," Strategic Management Journal, Wiley Blackwell, vol. 38(9), pages 1827-1847, September.
    36. Goodman-Bacon, Andrew, 2021. "Difference-in-differences with variation in treatment timing," Journal of Econometrics, Elsevier, vol. 225(2), pages 254-277.
    37. Erkens, Michael H.R. & Gan, Ying & Yurtoglu, B. Burcin, 2018. "Not all clawbacks are the same: Consequences of strong versus weak clawback provisions," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 291-317.
    38. Ke, Bin & Ramalingegowda, Santhosh, 2005. "Do institutional investors exploit the post-earnings announcement drift?," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 25-53, February.
    39. Nicole Y. Choi & Richard W. Sias, 2012. "Why Does Financial Strength Forecast Stock Returns? Evidence from Subsequent Demand by Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1550-1587.
    40. Borochin, Paul & Yang, Jie, 2017. "The effects of institutional investor objectives on firm valuation and governance," Journal of Financial Economics, Elsevier, vol. 126(1), pages 171-199.
    41. Lai, Karen M.Y. & Khedmati, Mehdi & Gul, Ferdinand A. & Mount, Matthew P., 2023. "Making honest men of them: Institutional investors, financial reporting, and the appointment of female directors to all-male boards," Journal of Corporate Finance, Elsevier, vol. 78(C).
    42. Maffett, Mark, 2012. "Financial reporting opacity and informed trading by international institutional investors," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 201-220.
    43. Chung, Kee H. & Zhang, Hao, 2011. "Corporate Governance and Institutional Ownership," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 247-273, February.
    44. Boone, Audra L. & White, Joshua T., 2015. "The effect of institutional ownership on firm transparency and information production," Journal of Financial Economics, Elsevier, vol. 117(3), pages 508-533.
    45. Sun, Liyang & Abraham, Sarah, 2021. "Estimating dynamic treatment effects in event studies with heterogeneous treatment effects," Journal of Econometrics, Elsevier, vol. 225(2), pages 175-199.
    46. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    47. Cohen, Shira & Kadach, Igor & Ormazabal, Gaizka, 2023. "Institutional investors, climate disclosure, and carbon emissions," Journal of Accounting and Economics, Elsevier, vol. 76(2).
    48. 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.
    49. Nina Schweiger & Kurt Matzler & Julia Hautz & Alfredo Massis, 2024. "Family businesses and strategic change: the role of family ownership," Review of Managerial Science, Springer, vol. 18(10), pages 2981-3005, October.
    50. Bin Ke & Kathy R. Petroni & Yong Yu, 2008. "The Effect of Regulation FD on Transient Institutional Investors' Trading Behavior," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 46(4), pages 853-883, September.
    51. Baker, Andrew C. & Larcker, David F. & Wang, Charles C.Y., 2022. "How much should we trust staggered difference-in-differences estimates?," Journal of Financial Economics, Elsevier, vol. 144(2), pages 370-395.
    52. Fiechter, Peter & Landsman, Wayne R. & Peasnell, Kenneth & Renders, Annelies, 2024. "Do industry-specific accounting standards matter for capital allocation decisions?," Journal of Accounting and Economics, Elsevier, vol. 77(2).
    53. Appel, Ian R. & Gormley, Todd A. & Keim, Donald B., 2016. "Passive investors, not passive owners," Journal of Financial Economics, Elsevier, vol. 121(1), pages 111-141.
    54. Ramalingegowda, Santhosh & Yu, Yong, 2012. "Institutional ownership and conservatism," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 98-114.
    55. Woon Sau Leung & Jiong Sun, 2021. "Policy Uncertainty and Customer Concentration," Production and Operations Management, Production and Operations Management Society, vol. 30(5), pages 1517-1542, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Duan, Rui & Larkin, Yelena, 2025. "Short-term institutional investors and the diffusion of supply chain information," Journal of Empirical Finance, Elsevier, vol. 81(C).
    2. Kang, Sanggyu & Chung, Chune Young & Kim, Dong-Soon, 2019. "The effect of institutional blockholders' short-termism on firm innovation: Evidence from the Korean market," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    3. Park, Jihwon & Sani, Jalal & Shroff, Nemit & White, Hal, 2019. "Disclosure incentives when competing firms have common ownership," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 387-415.
    4. Lili Dai & Jerry T. Parwada & Donald W. Winchester & Bohui Zhang, 2022. "The more we know, the less we agree: A test of the trading horizon heterogeneity theory," The Financial Review, Eastern Finance Association, vol. 57(1), pages 45-67, February.
    5. Anzhela Knyazeva & Diana Knyazeva & Leonard Kostovetsky, 2018. "Investor heterogeneity and trading," European Financial Management, European Financial Management Association, vol. 24(4), pages 680-718, September.
    6. Baig, Ahmed & DeLisle, R. Jared & Zaynutdinova, Gulnara R., 2022. "Index mutual fund ownership and financial reporting quality," Research in International Business and Finance, Elsevier, vol. 62(C).
    7. Biddle, Gary C. & Chan, Lilian H. & Joo, Jeong Hwan, 2024. "Clawback adoptions, managerial compensation incentives, capital investment mix and efficiency," Journal of Corporate Finance, Elsevier, vol. 84(C).
    8. Daoju Peng & Jianfu Shen & Simon Yu Kit Fung & Eddie C. M. Hui & Kwokyuen Fan, 2024. "The Valuation Effect and Consequences of Clawback Adoption in Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 68(2), pages 274-317, February.
    9. Xiaoqiong Wang & Siqi Wei & Xiaoyang Zhu, 2024. "Economic policy uncertainty and heterogeneous institutional investor horizons," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 39-67, January.
    10. Patrick Velte, 2020. "Determinants and consequences of clawback provisions in management compensation contracts: a structured literature review on empirical evidence," Business Research, Springer;German Academic Association for Business Research, vol. 13(3), pages 1417-1450, November.
    11. Da‐Hea Kim, 2022. "Investment horizon and option market activity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 923-958, May.
    12. Schoenfeld, Jordan, 2017. "The effect of voluntary disclosure on stock liquidity: New evidence from index funds," Journal of Accounting and Economics, Elsevier, vol. 63(1), pages 51-74.
    13. Yin, Chao & Ward, Charles & Tsolacos, Sotiris, 2018. "Motivated monitoring: The importance of the institutional investment horizon," International Review of Financial Analysis, Elsevier, vol. 60(C), pages 197-212.
    14. Buchanan, Bonnie & Cao, Cathy Xuying & Chen, Chongyang, 2018. "Corporate social responsibility, firm value, and influential institutional ownership," Journal of Corporate Finance, Elsevier, vol. 52(C), pages 73-95.
    15. Le, Anh & Yin, Xiangkang & Zhao, Jing, 2019. "Informed trading around earnings announcements in Australia," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    16. Dennis C. Hutschenreiter & Anna Toldrà -Simats & Bing Guo & David Pérez-Castrillo, 2023. "Institutional Blockholders and Corporate Innovation," Working Papers 1390, Barcelona School of Economics.
    17. Wang, Xiaoqiong & Wei, Siqi, 2021. "Does the investment horizon of institutional investors matter for stock liquidity?," International Review of Financial Analysis, Elsevier, vol. 74(C).
    18. Wilson, Mark & Wang, Kun Tracy & Wu, Yue & Lau, Archie, 2022. "Institutional investors and earnings management associated with controlling shareholders' promises: Evidence from the split share structure reform in China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    19. Feng, Lixuan & Xiang, Cheng, 2023. "Short-selling and mutual fund herding: The Chinese evidence," Finance Research Letters, Elsevier, vol. 52(C).
    20. Maffett, Mark, 2012. "Financial reporting opacity and informed trading by international institutional investors," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 201-220.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:91:y:2025:i:c:s0929119925000112. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.