Clawback adoptions, managerial compensation incentives, capital investment mix and efficiency

Gary C. Biddle, Lilian H. Chan and Jeong Hwan Joo

Journal of Corporate Finance, 2024, vol. 84, issue C

Abstract: We present evidence that clawback adoptions, by dissuading accruals management, motivate managers to shift capital investment mix from R&D to capex to preserve earnings-based compensation, thereby lowering capital investment efficiency. These effects are more pronounced for firms prone to financial misreporting, which is consistent with board incentives to adopt clawbacks, and with managerial incentives to substitute real for accruals-based earnings management to preserve performance-based compensation. Path analyses lend support to performance-based compensation serving as a channel through which clawback adoptions influence capital investment mix and efficiency. These findings extend and reinterpret prior findings and are timely given the Security and Exchange Commission's newly issued Rule 10D-1 that makes clawback provision adoptions a condition for U.S. exchange listings and explicitly requested “comment on any effect the proposed requirements may have on efficiency, competition, and capital formation.”

Keywords: Compensation clawback provisions; Capital investment mix; Performance-based pay; Equity incentives; Real effects; Capital investment efficiency; Investment q sensitivity; Research quotient (search for similar items in EconPapers)
JEL-codes: G18 G30 M41 M48 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:84:y:2024:i:c:s0929119923001554

DOI: 10.1016/j.jcorpfin.2023.102506

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