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Clawback Provisions and Firm Risk

Author

Listed:
  • Babenko, Ilona

    (Arizona State University)

  • Bennett, Benjamin

    (Ohio State University (OSU) - Department of Finance)

  • Bizjak, John M.

    (Texas Christian University)

  • Coles, Jeffrey L.

    (University of Utah - Department of Finance; Arizona State University (ASU) - Finance Department)

  • Sandvik, Jason J.

    (University of Utah)

Abstract

Panel OLS and GMM-IV estimates indicate that executives respond to the adoption of a compensation clawback provision by decreasing firm risk. The mechanisms that transmit incentives to decisions and decisions to risk appear to be more conservative investment and financial policies and preemptive management of ESG, legal, and cyberattack risks. The stock market reaction to the announcement of a clawback adoption, as well as post-adoption stock and accounting performance, are significantly and positively related to the actual and predicted reduction in firm risk. The reduction in firm risk, arising from adoption of a clawback policy, appears to benefit shareholders.

Suggested Citation

  • Babenko, Ilona & Bennett, Benjamin & Bizjak, John M. & Coles, Jeffrey L. & Sandvik, Jason J., 2019. "Clawback Provisions and Firm Risk," Working Paper Series 2019-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2019-13
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    File URL: http://ssrn.com/abstract=3382498
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    Cited by:

    1. Sandvik, Jason, 2020. "Board monitoring, director connections, and credit quality☆," Journal of Corporate Finance, Elsevier, vol. 65(C).
    2. 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.

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • 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
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

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