The effects of firm-initiated clawback provisions on bank loan contracting

Lilian H. Chan, Kevin C.W. Chen and Tai-Yuan Chen

Journal of Financial Economics, 2013, vol. 110, issue 3, 659-679

Abstract: Although firm-initiated clawbacks reduce accounting manipulation, they also induce managers to engage in suboptimal activities (e.g., reduce research and development (R&D) expenses) to achieve earnings targets. To assess the effectiveness of clawback provisions, we examine their impact from debtholders' point of view. We find that banks use more financial covenants and performance pricing provisions in the loan contracts and decrease interest rates after firms initiate clawbacks. Moreover, we also find that loan maturity increases and loan collateral decreases subsequent to clawback adoption. Taken together, our findings indicate that firm-initiated clawback provisions enhance financial reporting quality, thereby reducing the information uncertainty that financing providers face.

Keywords: Voluntary clawbacks; Bank loans; Information uncertainty (search for similar items in EconPapers)
JEL-codes: G21 G30 M21 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:110:y:2013:i:3:p:659-679

DOI: 10.1016/j.jfineco.2013.08.010

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