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Clawback enforcement, executive pay, and accounting manipulation

Author

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  • Alvaro Remesal

    (CUNEF Universidad)

Abstract

Clawback provisions entitle shareholders to recover previously-awarded compensation from managers involved in accounting manipulation or misconduct. In a principal-agent model, we show that strong clawback enforcement tilts managerial compensation towards the short-term but may increase manipulation. In contrast, weak enforcement alleviates the shareholders’ incentives to tilt compensation towards the short-term and reduces manipulation. While weak enforcement and lack of commitment may generate a time inconsistency problem, the clawback adoption decision may foster further governance changes that elicit ex post enforcement. We discuss the regulatory implications of the theory and its consistency with results in empirical studies.

Suggested Citation

  • Alvaro Remesal, 2025. "Clawback enforcement, executive pay, and accounting manipulation," European Journal of Law and Economics, Springer, vol. 59(2), pages 227-255, April.
    • Handle: RePEc:kap:ejlwec:v:59:y:2025:i:2:d:10.1007_s10657-024-09801-3
    DOI: 10.1007/s10657-024-09801-3
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    More about this item

    Keywords

    Clawback; Executives; Governance; Compensation; Accounting manipulation;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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