Corporate risk-taking after adoption of compensation clawback provisions

Yin Liu (), Huiqi Gan () and Khondkar Karim ()
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Yin Liu: State University of New York College at Brockport
Huiqi Gan: University of Massachusetts Lowell
Khondkar Karim: University of Massachusetts Lowell

Review of Quantitative Finance and Accounting, 2020, vol. 54, issue 2, No 8, 617-649

Abstract: Abstract The adoption of clawbacks purports to mitigate harmful behavior to firms’ operation, including excessive corporate risk-taking at the expense of investors’ interests and firms’ long-term benefits. This study empirically examines whether corporate risk-taking declines after the adoption of clawback provisions in the compensation contracts of top executives in publicly traded US firms. Using a sample of clawback adopters and non-adopters in the Russell 3000 Index firms during the period 2005–2014, we find that the presence of clawback provisions is significantly associated with a lower level of corporate risk-taking as reflected by firms’ investment strategies and their capital structure. Additional analyses suggest that this association is stronger for small firms and for firms audited by Big 4 auditors. Robustness checks of using alternative measures for corporate risk-taking, controlling for the occurrence of financial restatements, board independence, and internal control quality, and employing a propensity matching score matching sample further support the main results. Overall, the results of this study indicate more conservative corporate risk-taking behavior after the adoption of clawbacks.

Keywords: Clawback; Risk-taking; Investment policies; Compensation; Firm size; External auditor (search for similar items in EconPapers)
JEL-codes: G31 G34 G38 M41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11156-019-00801-y

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