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Review of Quantitative Finance and Accounting

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27-02-2023 | Original Research

The impact of clawback provisions on executive cash compensation

Authors: Hanni Liu, Harrison Liu, Jennifer Yin

Published in: Review of Quantitative Finance and Accounting | Issue 1/2023

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Abstract

An asymmetric payoff function exists in CEO compensation: the sensitivity between CEO cash compensation and negative stock returns is higher than that to positive stock returns. The underlying rationale for such an asymmetrical relationship is that the difficulty of the ex post settling up of cash compensation prompts boards to reduce compensation when there is bad news. In this paper, we examine firms that adopt clawback provisions and find no evidence of such an asymmetry in these firms. The finding is consistent with the clawback provision’s ex post settling up characteristics. Our paper contributes to the literature by showing that clawback provisions favorably impact the structure of CEO compensation by reducing agency costs related to the ex post settling up problem.

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We also use the propensity score matching method as a robustness test in the later section.

We run three-way-interaction regressions, and the results remain unchanged.

We replicate LWZ and SZ studies using their models and sample periods before testing our hypotheses. The replication results are almost identical to those reported in LWZ and SZ. Because compensation reporting changed in 2006, we calculate cash compensation as the sum of salary, bonus, and non-equity incentives.

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Title: The impact of clawback provisions on executive cash compensation
Authors: Hanni Liu
Harrison Liu
Jennifer Yin
Publication date: 27-02-2023
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 1/2023
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-023-01136-5

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