Why do Clawback Provisions Affect Financial Reporting Quality? - An Analysis of Trigger Effects
We identify clawback triggers from firms- proxy
statements (Form DEF 14A) and use the likelihood of restatements to
proxy for financial reporting quality. Based on a sample of 578 U.S.
firms that voluntarily adopt clawback provisions during 2003-2009,
when restatement-based triggers could be decomposed into two types:
fraud and unintentional error, and we do observe the evidence that
using fraud triggers is associated with high financial reporting quality.
The findings support that fraud triggers can enhance deterrent effect of
clawback provision by establishing a viable disincentive against fraud,
misconduct, and otherwise harmful acts. These results are robust to
controlling for the compensation components, to different sample
specifications and to a number of sensitivity.
[1] N. Addy, and T. Yoder. "The decision to adopt a clawback
provision," The CPA Journal (January), 2011, pp. 58-63.
[2] I. Babenko, B. Bennett, J. M. Bizjak, and J. L. Jeffrey, "Clawback
provisions," 2012, Available at SSRN: http://ssrn.com/abstract=2023292
[3] A. B. Brown, P. Y. Davis-Friday, and L. Guler, "Economic determinants
of the voluntary adoption of clawback provisions in executive
compensation contracts," 2011, SSRN eLibrary.
[4] L.H. Chan, K.C.W. Chen, T. Chen and Y. Yu, "The effects of
firm-initiated clawback provisions on earnings quality and auditor
behavior," Journal of Accounting and Economics, 2012a.
[5] L.H. Chan, K.C.W. Chen, T. Chen and Y. Yu, "Substitution between real
and accrual-based earnings management after voluntary adoption of
compensation clawback provisions," Working paper, Hong Kong
University of Science and Technology, 2012b.
[6] E. DeHaan, F. Hodge, and T. Shevlin, "Does voluntary adoption of a
clawback provision improve financial reporting quality?" Contemporary
Accounting Research, forthcoming, 2012.
[7] X. Gao, M. Iskandar-Datta and Y. Jia, "Piercing the corporate veil: The
case for clawback provisions" Working paper, Wayne State University,
2010.
[8] K. Hennes, A. Leone, and B. Miller, "The importance of distinguishing
errors from irregularities in restatement research: The case of restatements
and CEO/CFO turnover," The Accounting Review 83 (6): 1487-1519,
2008.
[1] N. Addy, and T. Yoder. "The decision to adopt a clawback
provision," The CPA Journal (January), 2011, pp. 58-63.
[2] I. Babenko, B. Bennett, J. M. Bizjak, and J. L. Jeffrey, "Clawback
provisions," 2012, Available at SSRN: http://ssrn.com/abstract=2023292
[3] A. B. Brown, P. Y. Davis-Friday, and L. Guler, "Economic determinants
of the voluntary adoption of clawback provisions in executive
compensation contracts," 2011, SSRN eLibrary.
[4] L.H. Chan, K.C.W. Chen, T. Chen and Y. Yu, "The effects of
firm-initiated clawback provisions on earnings quality and auditor
behavior," Journal of Accounting and Economics, 2012a.
[5] L.H. Chan, K.C.W. Chen, T. Chen and Y. Yu, "Substitution between real
and accrual-based earnings management after voluntary adoption of
compensation clawback provisions," Working paper, Hong Kong
University of Science and Technology, 2012b.
[6] E. DeHaan, F. Hodge, and T. Shevlin, "Does voluntary adoption of a
clawback provision improve financial reporting quality?" Contemporary
Accounting Research, forthcoming, 2012.
[7] X. Gao, M. Iskandar-Datta and Y. Jia, "Piercing the corporate veil: The
case for clawback provisions" Working paper, Wayne State University,
2010.
[8] K. Hennes, A. Leone, and B. Miller, "The importance of distinguishing
errors from irregularities in restatement research: The case of restatements
and CEO/CFO turnover," The Accounting Review 83 (6): 1487-1519,
2008.
@article{"International Journal of Business, Human and Social Sciences:54973", author = "Yu-Chun Lin", title = "Why do Clawback Provisions Affect Financial Reporting Quality? - An Analysis of Trigger Effects", abstract = "We identify clawback triggers from firms- proxy
statements (Form DEF 14A) and use the likelihood of restatements to
proxy for financial reporting quality. Based on a sample of 578 U.S.
firms that voluntarily adopt clawback provisions during 2003-2009,
when restatement-based triggers could be decomposed into two types:
fraud and unintentional error, and we do observe the evidence that
using fraud triggers is associated with high financial reporting quality.
The findings support that fraud triggers can enhance deterrent effect of
clawback provision by establishing a viable disincentive against fraud,
misconduct, and otherwise harmful acts. These results are robust to
controlling for the compensation components, to different sample
specifications and to a number of sensitivity.", keywords = "Accruals quality, Clawback provisions, Compensation, Restatements.", volume = "7", number = "6", pages = "1541-4", }