Other Side of Voluntary Clawback Provisions in Executive Compensation Contracts: Evidence from the Investment Efficiency

Sohyung Kim (), Cheol Lee and Santanu Mitra ()
Additional contact information
Sohyung Kim: Department of Accounting, Goodman School of Business, Brock University, Canada
Cheol Lee: Department of Accounting, Mike Ilitch School of Business, Wayne State University, USA
Santanu Mitra: Department of Accounting, Mike Ilitch School of Business, Wayne State University, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2022, vol. 25, issue 01, 1-50

Abstract: This study examines how firm-initiated clawback provisions in executive compensation contracts affect firms’ investment efficiency. While existing the literature provides evidence on positive aspects of adopting clawback provisions, the potential impact of clawback adoption on firms’ long-term investment efficiency remains unexplored. Using three investment proxies (i.e., capital expenditure, new investment, and total investment), we find that clawback adopters tend to reduce their long-term investments after the clawback provisions are put in place, compared to nonadopters. In particular, we find evidence that the adoption of clawback policies decreases the investment efficiency in the post-adoption period, especially for the firms whose ex ante probability of underinvestment is high. Our additional analyses reveal that observed reduction in the investment efficiency for the firms that are likely to underinvest is more evident for the firms with financial constraints and the firms that adopt risk-taking and performance-based clawback triggers. In contrast, the clawback adopters that are likely to overinvest do not change their investment behavior in the post-adoption period. Overall, our findings suggest that the impleme ntation of clawback provisions may lead to unintended consequences for firms’ long-term investment practices, resulting in a decrease in the investment efficiency.

Keywords: Clawback provision; risk-taking behavior; investment efficiency; management compensation (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219091522500011
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:wsi:rpbfmp:v:25:y:2022:i:01:n:s0219091522500011

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219091522500011

Access Statistics for this article

Review of Pacific Basin Financial Markets and Policies (RPBFMP) is currently edited by Cheng-few Lee

More articles in Review of Pacific Basin Financial Markets and Policies (RPBFMP) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().