Relationships among corporate governance mechanisms: evidence based on executive compensation clawback provisions

This study examines the relationships between executive compensation clawback provisions and other major corporate governance mechanisms, including both internal corporate governance and external corporate governance, and whether clawback provisions enhance a firms financial performance. Using a sample of S%P 1500 firms over the period of 2005 through 2009, our results show that clawback provisions are complements to firms' existing internal governance measures and are substitutes to external corporate governance measures. We also employ the propensity-score matching technique and the difference-in-differences research design, and find that clawback firms have higher ROE and ROA. Our evidence is consistent with agency theory, but inconsistent with stewardship theory. We conclude that corporate governance mechanisms are interrelated in significant and meaningful ways, and that ignoring the interactions among different governance mechanisms likely leads to misleading results. We argue that our empirical evidence should be taken into consideration for policy-making and for future corporate governance studies.