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

Author

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

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.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jaecon:v:54:y:2012:i:2:p:180-196
    DOI: 10.1016/j.jacceco.2012.05.001
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    More about this item

    Keywords

    Clawbacks; Accounting restatements; The Dodd-Frank Act; Audit risk; Audit fees;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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