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Not all clawbacks are the same: Consequences of strong versus weak clawback provisions

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  • Erkens, Michael H.R.
  • Gan, Ying
  • Yurtoglu, B. Burcin

Abstract

We develop a Clawback Strength Index and show that while some firms adopt unambiguous and strong clawback provisions, others adopt weak ones. We find that strong clawback adopters experience improvements in financial reporting quality, fewer CEO turnovers, and lower CEO pay. We advance two possible explanations: First, clawback strength may be primarily responsible for the improvements in reporting quality. Second, strong clawbacks may yield benefits because they are part of a broader reform package. While our findings on reporting quality and CEO turnover are consistent with both explanations, our results on CEO pay support only the broader reform explanation.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jaecon:v:66:y:2018:i:1:p:291-317
    DOI: 10.1016/j.jacceco.2018.06.002
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    Cited by:

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    2. Patrick Velte, 2023. "The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research," Management Review Quarterly, Springer, vol. 73(1), pages 353-411, February.
    3. Aghanya, Daniel & Agarwal, Vineet & Poshakwale, Sunil, 2020. "Market in Financial Instruments Directive (MiFID), stock price informativeness and liquidity," Journal of Banking & Finance, Elsevier, vol. 113(C).
    4. 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.
    5. Bulte, Erwin & List, John A. & van Soest, Daan, 2021. "Incentive spillovers in the workplace: Evidence from two field experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 184(C), pages 137-149.
    6. Feng, Cong & Fay, Scott, 2021. "Chief stores officer and retailer performance," Journal of Retailing and Consumer Services, Elsevier, vol. 58(C).
    7. 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.
    8. Capkun, Vedran & Ors, Evren, 2021. "Replacing key employee retention plans with incentive plans in bankruptcy," Accounting, Organizations and Society, Elsevier, vol. 94(C).
    9. Cha, Yunshil & Gill, Susan & Wong-On-Wing, Bernard, 2023. "Clawback policy enforcement: To disclose or not to disclose," Advances in accounting, Elsevier, vol. 62(C).
    10. Dina El Mahdy, 2020. "The unintended consequences of voluntary adoption of clawback provisions on managerial ability," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3493-3526, December.

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    More about this item

    Keywords

    Clawback provisions; Corporate governance; Linguistic analysis; Reporting quality;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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