Firm-Initiated Clawback Provisions: Real Activities Earnings Management, Analyst Coverage, And Innovation
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Date
2015
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Department
Business and Management
Program
Doctor of Philosophy
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This item is made available by Morgan State University for personal, educational, and research purposes in accordance with Title 17 of the U.S. Copyright Law. Other uses may require permission from the copyright owner.
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Abstract
"Clawback Provisions" have been defined as corporate governance mechanisms intended to reduce executive risk-taking and opportunistic behavior. Although firm-initiated clawback provisions have been associated with several positive consequences in extant literature, there is little empirical evidence of their having a diminishing effect on executive risk-taking and opportunistic behavior. Additionally, there is a need to better understand the consequences of voluntary clawback adoption as the debate on mandatory clawback provisions for all publicly traded companies in the U.S. rages on. In this study, I focus on restatement triggered clawback provisions, and examine two research questions: whether clawback adoption influences the executive risk-taking behavior, and whether clawback adoption impacts the firm's information environment and innovation output. I use the difference-in-difference research design on a propensity score-matched sample of 418 firms for the period 2010-2013. I find that despite the increase in manipulation of operational cash flows to increase short-term earnings, which is a documented adverse consequence of clawback adoption, executives significantly reduce manipulation of discretionary expenses. In addition, executives in clawback firms earn higher total compensation, earn lower proportion of bonuses to total compensation, exercise more in-the-money exercisable options as a proportion of total compensation, and have lower Vega overall. These findings suggest that executives of clawback firms are more risk-averse than those in non-clawback firms. I also find that clawback firms have higher analyst following and more accurate analyst forecasts, implying better information environments, and have lower output from innovative activities compared to non-clawback firms. I, therefore, make several contributions to the literature on voluntary clawback adoption. I add to the list of the consequences of voluntary clawback adoption, document evidence of the change in executive risk-taking behavior upon the clawback adoption, and the impact of clawback adoption on a specific firm activity, innovation. I also provide empirical evidence that adoption of clawback provisions is better explained by the causal hypothesis than by the signaling hypothesis of voluntary clawback adoption. Overall, my study significantly adds to the on-going debate on mandatory clawback adoption for all publicly traded firms in the U.S.