Determinants and Consequences of the Severity of Executive Compensation Clawbacks Bright Asante-Appiah and Divesh S. Sharma
Contemporary Accounting Research, Vol. 39, No. 4 (Winter 2022), pp. 2409-2455
OVERVIEW
As one of the most substantial, prolonged, and controversial proposals for reforming executive compensation, clawback rules recently regained the attention of the US Securities and Exchange Commission (SEC). Our intuitive severity score finds that clawbacks are not homogenous, as the literature assumes, but vary widely. Our determinants analyses suggest that their severity is increasing in firms with effective boards and high cash and stock awards as director compensation, and attenuated in firms with powerful CEOS and stock options as director compensation. Our consequences analyses indicate that while severe clawbacks deter financial restatements, management circumvents them by reducing research and development expenses to avoid earnings decreases, and boardroom dynamics dilute their benefits. Our findings have strong implications for the efficacy of the SEC’s recent implementation of executive compensation clawback rules and boards’ crafting and triggering of clawback provisions.
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