Title
Can shareholders be at rest after adopting clawback provisions? Evidence from stock price crash risk
Document Type
Journal article
Source Publication
Contemporary Accounting Research
Publication Date
6-2017
Volume
Advance online publication
Publisher
Canadian Academic Accounting Association
Keywords
stock price crash risk, clawback provision, real earnings management, annual report readability
Abstract
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 policy makers considering the effects of clawback adoption on the investing public.
DOI
10.1111/1911-3846.12326
Print ISSN
08239150
E-ISSN
19113846
Publisher Statement
Copyright © 2017 John Wiley & Sons, Inc. Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Bao, D., Fung, S. Y. K. & Su, L. (2017). Can shareholders be at rest after adopting clawback provisions? Evidence from stock price crash risk. Contemporary Accounting Research. Advance online publication. doi: 10.1111/1911-3846.12326
