Multiperiod managerial contracts with clawback provisions

Hao-Chang Sung ()
Additional contact information
Hao-Chang Sung: National Chung Cheng University

Review of Quantitative Finance and Accounting, 2025, vol. 64, issue 2, No 12, 899-940

Abstract: Abstract Considering the trade-off between reporting accuracy and production efficiency, in this paper, I study the impacts of clawback provisions where, within the clawbacks, if the long-term reported earnings do not meet the predetermined earnings threshold, the manager cannot earn his/her long-term compensation. He/she will only receive the fixed compensation and needs to return the portion of his/her period-one performance-based compensation over the recouped compensation threshold when the first-period reported earnings are higher than the recouped compensation threshold. Within a principal-agent model, this paper shows that first, depending on the level of realized earnings in period one, mandatory adoption of such clawbacks motivates a risk-averse manager to use an enriched reporting strategy menu. Second, adopting the clawbacks will induce the manager to engage in lower or higher short-term effort but lower long-term effort relative to the case without clawbacks. However, a higher recouped compensation threshold will motivate the risk-averse manager to a higher short-term effort. Then, to recalibrate the manager’s effort incentives to be the same as in the case of no clawbacks but restrain his/her misreporting incentives, this study shows that a firm should grant a risk-averse manager a lower short-term fixed pay level but a higher long-term pay level relative to the case without clawbacks. Besides, the performance pay rates for the two periods must be sufficiently different in order to control the manager’s misreporting incentives. Finally, this paper discusses the empirical implications of the results and provides the policy implications regarding the efficiency of meeting or beating earnings thresholds when managerial contracts contain clawback provisions.

Keywords: Clawback provision; Managerial compensation; Earnings management; Meeting or beating earnings thresholds; Mandatory clawback provisions (search for similar items in EconPapers)
JEL-codes: G34 G38 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11156-024-01322-z Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:64:y:2025:i:2:d:10.1007_s11156-024-01322-z

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-024-01322-z

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().