Insider sales and the effectiveness of clawback adoptions in mitigating fraud risk

Fung, Simon Yu Kit, Raman, K.K., Sun, Lili and Xu, Li 2015, Insider sales and the effectiveness of clawback adoptions in mitigating fraud risk, Journal of accounting and public policy, vol. 34, no. 4, pp. 417-436, doi: 10.1016/j.jaccpubpol.2015.04.002.

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Title Insider sales and the effectiveness of clawback adoptions in mitigating fraud risk
Author(s) Fung, Simon Yu KitORCID iD for Fung, Simon Yu Kit
Raman, K.K.
Sun, Lili
Xu, Li
Journal name Journal of accounting and public policy
Volume number 34
Issue number 4
Start page 417
End page 436
Total pages 20
Publisher Elsevier
Place of publication New York, N.Y.
Publication date 2015-07
ISSN 0278-4254
Summary In recent years, firms (and lawmakers) have sought to mitigate the dysfunctional effects of incentive-based executive compensation by adopting clawbacks. However, extant clawbacks (whether firm-initiated or as mandated by the 2010 Dodd-Frank Act) do not go far enough in that they seem to allow executives to retain trading profits linked to sales of their own companies' shares at a time of inflated earnings (Fried and Shilon, 2011). In this paper, we examine the moderating effect of insider sales on the relation between firm-initiated clawback-adoptions and fraud risk. Our results indicate that clawback-adopting firms experience a decrease in fraud risk following adoption relative to non-adopters during the same time period. However, this decrease in fraud risk for the clawback-adopting firms is materially weakened in the presence of insider trading. At this time (July 2014), the SEC is still working on rules for implementing clawbacks (one of nearly half of the rules yet to be completed under Dodd-Frank). Our findings suggest that clawback rules (as and when issued by the SEC) need to address insider sales for clawbacks to be fully effective in mitigating the risk of fraudulent financial reporting.
Language eng
DOI 10.1016/j.jaccpubpol.2015.04.002
Field of Research 150103 Financial Accounting
1501 Accounting, Auditing And Accountability
Socio Economic Objective 900201 Administration and Business Support Services
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2015, Elsevier
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Document type: Journal Article
Collections: Faculty of Business and Law
Department of Accounting
2018 ERA Submission
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