Recovering Bonuses After Restated Financials: Adopting Clawback Provisions

Addy, Noel; Chu, Xiaoyan; Yoder, Timothy R.

doi:10.2139/ssrn.1463992

Cited by 19 publications

(26 citation statements)

References 12 publications

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“…The results in Table also show that CEO‐chair duality has no significant impact on a firm's decision to adopt a clawback provision. This result differs from that in Addy et al () who find that firms with CEOs who also chair the board are more likely to adopt a clawback provision. There are several potential reasons for the differing results.…”

Section: Empirical Models Sample Selection and Resultscontrasting

confidence: 99%

“…Section 304 of the Sarbanes‐Oxley Act (SOX) requires executives to forfeit any bonus or incentive‐based pay or profits from the sale of stock received in the 12 months prior to an earnings restatement. Addy et al () find that past restatements are a significant determinant of a firm's decision to voluntarily adopt a clawback provision. Therefore, we control for past restatements by including control variables for restatements due to irregularities and errors over the five‐year period prior to the year of clawback adoption .…”

Section: Empirical Models Sample Selection and Resultsmentioning

confidence: 99%

“…However, in keeping with the results from their event study analyses, they focus primarily on the context of restated financial statements. They conclude that the adoption of a clawback provision is more likely when the board is more independent, when the firm has had a prior restatement, and, in contradiction to Addy et al (2011), when the CEO is less powerful.…”

Section: Introductionmentioning

confidence: 99%

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M&A Decisions and US Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts

Brown¹,

Davis‐Friday²,

Guler³

et al. 2015

Business Fin & Account

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Abstract:We examine whether US firms' M&A decisions influence the likelihood of voluntary adoption of clawback provisions in executive compensation contracts and whether clawback adoption improves subsequent M&A decisions. Because prior research finds that poor M&A decisions are associated with future earnings restatements, we predict that clawback adoption is more likely after these transactions. We further conjecture that M&A decisions will improve after clawback adoption, as its presence reduces executives' willingness to manipulate post-acquisition earnings. Consistent with our expectations, we find that (1) firms with more negative M&A announcement returns are more likely to adopt clawbacks; (2) firms that acquire targets with relatively poor accounting quality are more likely to adopt clawbacks; (3) clawbacks improve investor perception of M&A quality; and (4) executives are more responsive to the market when completing M&A deals if their compensation contracts include clawbacks. These results suggest that boards take a pro-active approach and consider factors that may lead to restatements when adopting clawbacks. Our results have implications for US policymakers, as the Dodd-Frank Act of 2010 requires mandatory adoption of clawbacks. Our results also suggest that non-US firms can reduce managerial incentives to manipulate post-takeover earnings by using clawbacks.

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Section: Empirical Models Sample Selection and Resultscontrasting

confidence: 99%

Section: Empirical Models Sample Selection and Resultsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

M&A Decisions and US Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts

Brown¹,

Davis‐Friday²,

Guler³

et al. 2015

Business Fin & Account

View full text Add to dashboard Cite

show abstract

“…Several related studies (e.g.,Addy et al, 2009;Brown et al, 2011;Gao et al, 2011) examine the determinants of clawback adoption but not the impacts on financial reporting quality and in turn on investors and auditors, which is the focus of our study.L.H. Chan et al / Journal of Accounting and Economics 54 (2012) 180-196…”

mentioning

confidence: 98%

The effects of firm-initiated clawback provisions on earnings quality and auditor behavior

Chan

Chen

et al. 2012

Journal of Accounting and Economics

176

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a b s t r a c tWhile 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.

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“…18 Recent working papers provide evidence on the type of fi rms that voluntarily adopt clawback provisions. Specifi cally, Addy et al (2009) fi nd that adoption of clawback provisions is negatively related to management entrenchment, and is positively related to recent restatements and director interlocks with other companies with clawbacks. In addition, Brown et al (2011) (2011) fi nd that the market ' s reaction to earnings surprises reported by TARP recipient fi rms after their mandatory clawback adoption is larger than it was in the three years prior to the adoption.…”

Section: Notesmentioning

confidence: 99%

Influence of TARP regulations on executive compensation plans and corporate governance of ‘exceptional assistance’ recipients

Bannister¹,

Newman

Peng³

2012

Int J Discl Gov

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Our article examines proxy statement disclosures to gain insight about the role of the Special Master, the requirement of a risk analysis of compensation plans and the requirement of a provision for compensation clawbacks for fi rms receiving ' exceptional assistance ' under the Emergency Economic Stabilization Act of 2008. We examine the only three fi rms -AIG, Citigroup and Bank of America -that both received exceptional assistance and provided 2010 proxy statements. We fi nd that the Special Master, in his capacity of reviewing and approving compensation payouts and compensation structures as a government representative, mitigated the costs of TARP restrictions by using his discretion to override some restrictions, such as allowing cash compensation in excess of the $ 500 000 maximum. We also observe signifi cantly more compensation-related risk disclosures and a greater focus on risk in the design of compensation plans and choice of performance metrics after fi rms were required to analyze whether compensation plans motivate excessive risk-taking. All three fi rms appear to acknowledge concerns about their compensation plans, either explicitly by formally stating their concerns or implicitly by adopting new risk-related performance measures. In addition, we note that the amount of disclosure the three fi rms provide in responding to the same regulations differs signifi cantly. Finally, we fi nd that some fi rms adopted

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Recovering Bonuses After Restated Financials: Adopting Clawback Provisions

Cited by 19 publications

References 12 publications

M&A Decisions and US Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts

M&A Decisions and US Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts

The effects of firm-initiated clawback provisions on earnings quality and auditor behavior

Influence of TARP regulations on executive compensation plans and corporate governance of ‘exceptional assistance’ recipients

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