The Review of Corporate Finance Studies Vol. 12 No. 2 2023

Clawback Provisions and Firm Risk

Ilona Babenko¹; Benjamin Bennett²; John M. Bizjak³; Jeffrey L. Coles⁴; Jason Sandvik⁵

¹ W. P. Carey School of Business, Arizona State University , USA · ² A. B. Freeman School of Business, Tulane University , USA · ³ Neeley School of Business, Texas Christian University , USA · ⁴ David Eccles School of Business, University of Utah , USA · ⁵ Eller College of Management, University of Arizona , USA

Abstract

Many of the events that trigger clawback provisions are associated with risky corporate policies and variable performance outcomes. We propose and test the hypothesis that clawback provisions motivate managers to reduce firm risk. Panel ordinary least squares, general method of moments with instrumental variables, and propensity square matching models all indicate that clawback provisions decrease the volatility of stock returns. The channels that connect clawback presence to firm risk include more conservative investment and financial policies. The clawback-induced reduction in risk-taking appears to benefit shareholders on average. The gains from reduced risk-taking are larger for firms with fewer growth options, lower R&D, and prior wrongdoing.

DOI

10.1093/rcfs/cfad003

Volume

12

Issue

2

Pages

191-239

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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