August 22, 2018
Clawbacks: The Devil’s in the Details
– Liz Dunshee
I blogged a while back about a study showing that having a clawback policy improves the quality of financial reports. A forthcoming study in the Journal of Accounting & Economics puts a finer point on that: it’s what’s in the policy (and who is covered) that actually matters. This “Columbia Law” blog summarizes the findings. Here’s an excerpt:
Most studies report strong evidence that firm-initiated clawbacks are effective in improving financial reporting quality and that investors respond positively to clawback adoption. These studies treat clawbacks as a binary choice: A firm either does or does not have a clawback. The common interpretation of these results is that the mere adoption of the clawback is the primary cause of the observed benefits.
Our study provides the first evidence of the different economic consequences for firms that voluntarily adopt clawbacks. Not all clawbacks are the same: Some lead to significant economic benefits, while others do not. An important implication of our study is that one may interpret the results of prior clawback studies with more caution, as they attribute all beneficial effects of clawbacks to their mere adoption. This overlooks the variation in clawback design and the notion that governance mechanisms interact in potentially important ways, and thereby ignores the benefits of broader governance reform.
Our findings also have implications for shareholders and regulators. Given that the mere adoption of even strong clawbacks does not necessarily improve financial reporting, the impact of mandating clawback provisions under Section 954 of the Dodd-Frank Act may be overstated.
Check out this Willis Towers Watson blog for further analysis…