M&A Decisions and US Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts

Anna Bergman Brown, Paquita Y. Davis-Friday, Lale Guler and Carol Marquardt

Journal of Business Finance & Accounting, 2015, vol. 42, issue 1-2, 237-271

Abstract: We examine whether US firms’ M&A decisions influence the likelihood of voluntary adoption of clawback provisions in executive compensation contracts and whether clawback adoption improves subsequent M&A decisions. Because prior research finds that poor M&A decisions are associated with future earnings restatements, we predict that clawback adoption is more likely after these transactions. We further conjecture that M&A decisions will improve after clawback adoption, as its presence reduces executives’ willingness to manipulate post-acquisition earnings. Consistent with our expectations, we find that (1) firms with more negative M&A announcement returns are more likely to adopt clawbacks; (2) firms that acquire targets with relatively poor accounting quality are more likely to adopt clawbacks; (3) clawbacks improve investor perception of M&A quality; and (4) executives are more responsive to the market when completing M&A deals if their compensation contracts include clawbacks. These results suggest that boards take a pro-active approach and consider factors that may lead to restatements when adopting clawbacks. Our results have implications for US policymakers, as the Dodd-Frank Act of 2010 requires mandatory adoption of clawbacks. Our results also suggest that non-US firms can reduce managerial incentives to manipulate post-takeover earnings by using clawbacks.

Date: 2015
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