To deter financial misstatements, many companies have recently adopted compensation recovery policies—commonly known as “clawbacks”—that authorize the board to recoup compensation paid to executives based on misstated financial reports. Clawbacks have been shown to reduce financial misstatements and increase investors' confidence on earnings information. We show that the benefits come with an unintended consequence of certain firms substituting for accruals management with real transactions management (e.g., reduce research and development [R&D] expenditures), especially firms with strong incentives to achieve short-term earnings targets, such as firms with high growth or high transient institutional ownership. As such, the total amount of earnings management does not decrease subsequent to clawback adoption. We further show that although real transactions management temporarily boosts those clawback adopters' short-term profitability and stock performance, this trend reverses after three years. In summary, clawbacks may have unexpected effects for a subset of firms whose managers are under greater pressure to meet earnings goals. Data Availability: All data used in the study are publicly available from the sources cited in the text.
While firm-initiated compensation recovery (or clawback) provisions are gaining popularity and the recently enacted Dodd-Frank Act seeks to make the clawback of erroneously awarded compensation mandatory for all listed companies, little is known about their effectiveness. We find that the incidence of accounting restatements declines after firms initiate such provisions. In addition, we show that investors and auditors view such provisions as associated with increased accounting quality and lower audit risk. Specifically, we find that firms' earnings response coefficients increase after the adoption of clawback provisions. Further, for firms that adopt clawbacks, auditors are less likely to report material internal control weaknesses, charge lower audit fees, and issue audit reports with a shorter lag. IntroductionCompensation recovery provisions (commonly known as ''clawbacks''), which allow firms to recoup compensation from corporate executives involved in accounting improprieties, were first introduced by Section 304 of the Sarbanes-Oxley Act (hereafter, SOX 304) in 2002. SOX 304 authorizes the Securities and Exchange Commission (SEC) to enforce the recovery of bonuses paid to CEOs and CFOs of public companies when the company restates its financial statements due to material noncompliance with any financial reporting requirement as a result of misconduct. However, due to the ambiguities in SOX 304 and the SEC's limited resources, SOX 304 has been successfully enforced in only a few cases (Salehi and Marino, 2008;Fried and Shilon, 2011;Morgenson, 2011). To facilitate the enforcement of clawbacks, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act also includes a section (Section 954) on the recovery of erroneously awarded compensation (hereafter, DFA 954). DFA 954 improves upon SOX 304 in two important respects. First, it designates a firm's board of directors, rather than the SEC, as the enforcer of clawbacks. Second, it does not require misconduct as a prerequisite for clawbacks.Since DFA 954 will not be implemented until the first half of 2012, it is not yet possible to empirically determine the extent to which mandatory clawbacks enforced by the board enhance financial reporting integrity. 1 The usefulness of the mandatory clawbacks, however, can be inferred from the clawbacks that are adopted voluntarily. Voluntary clawbacks have become increasingly popular among listed companies in recent years. According to a survey reported by Corporate Library, 194 companies in the S&P 500 index (about 39%) had adopted clawback provisions as of early 2010. Similar to DFA 954, voluntary clawbacks designate a firm's board as the enforcer of the clawbacks. However, unlike DFA 954, voluntary clawbacks usually require misconduct as a prerequisite for enforcement (Fried and Shilon, 2011). Voluntary clawbacks are therefore stronger than SOX 304 but weaker than DFA 954. If firm-initiated clawbacks are found to improve financial reporting quality, DFA 954 is also likely to be beneficial. In this study, we exam...
Objective: Climate change is affecting the ability of food systems to provide sufficient nutritious and affordable foods at all times. Healthy and sustainable (H&S) food choices are important contributions to health and climate change policy efforts. This paper presents empirical data on the affordability of a food basket that incorporates principles of health and sustainability across different food sub-systems, socioeconomic neighbourhoods and household income levels in Greater Western Sydney, Australia. Methods:A basket survey was used to investigate the cost of both a typical basket of food and a hypothetical H&S basket. The price of foods in the two baskets was recorded in five neighbourhoods, and the affordability of the baskets was determined across household income quintiles. Results:The cost of the H&S basket was more than the typical basket in all five socioeconomic neighbourhoods, with most disadvantaged neighbourhood spending proportionately more (30%) to buy the H&S basket. Within household income levels, the greatest inequity was found in the middle income neighbourhood, showing that households in the lowest income quintile would have to spend up to 48% of their weekly income to buy the H&S basket, while households in the highest income quintile would have to spend significantly less of their weekly income (9%). Conclusion:The most disadvantaged groups in the region, both at the neighbourhood and household level, experience the greatest inequality in affordability of the H&S diet. Implications:The results highlight the current inequity in food choice in the region and the underlying social issues of cost and affordability of H&S foods.
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