The effects of firm-initiated clawback provisions on earnings management

Abstract

This paper examines whether the adoption of clawback provisions decreases earnings management. Clawback provisions are intended to discourage managers' opportunistic behavior by enabling companies to recoup erroneously awarded compensation in the event of an accounting restatement. Using firms that voluntarily implement clawback provisions, I find that clawback-adopters experience a reduction in both accrual-based and real earnings management in the post-adoption period, relative to non-adopters. These results are robust to multiple approaches controlling for endogeneity of the clawback decision. In addition, these results are also consistent within subsamples of firms facing high level of incentives to manage earnings, suggesting that clawback provisions remain effective in curbing accrual-based earnings management even when managers are under more pressure to manipulate earnings. Overall, the findings are consistent with clawback adoption signaling a move towards overall higher reporting quality.