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Can shareholders be at rest after adopting clawback provisions? Evidence from stock price crash risk

Version 2 2024-06-04, 09:42
Version 1 2018-03-08, 10:22
journal contribution
posted on 2024-06-04, 09:42 authored by D Bao, Simon FungSimon Fung, LN Su
Using a propensity score matched sample and a difference-in-differences research design, we find that stock price crash risk increases after a firm voluntarily incorporates clawback provisions in executive officers' compensation contracts. This heightened crash risk is concentrated in adopters that increase upward real activities-based earnings management and those that reduce the readability of 10-K reports. Based on cross-sectional analyses, we also find that the increased crash risk is more pronounced for adopters with high ex ante fraud risk, low-ability managers, high CEO equity incentives, and low dedicated institutional ownership. Collectively, our results suggest that the clawback adoption per se does not curb managerial opportunism but rather induces managers to use alternative channels for concealing bad news, which may contribute to a greater stock price crash risk; and the increase in crash risk is more likely in cases where incentives are strong or monitoring is weak. Our results should be of interest to regulators and policymakers considering the effects of clawback adoption on the investing public.

History

Journal

Contemporary accounting research

Volume

35

Season

Fall

Pagination

1578-1615

Location

Chichester, Eng.

ISSN

0823-9150

eISSN

1911-3846

Language

eng

Publication classification

C Journal article, C1 Refereed article in a scholarly journal

Copyright notice

2018, CAAA

Issue

3

Publisher

John Wiley and Sons