Clawback Provision of SOX, Financial Misstatements, and CEO Compensation Contracts

Zheng, Kenneth

doi:10.1177/0148558x16686740

Cited by 14 publications

(13 citation statements)

References 32 publications

(52 reference statements)

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“…According to DeHaan et al (2013) and , both CEO compensation and PPS were increased by clawback adoption. In contrast, Natarajan and Zheng (2019) found that mandatory SOX clawbacks lead to decreased CEO in-the-money option value. Moreover, clawbacks are linked with decreased asymmetric sensitivity between CEO/CFO cash compensation and firm performance (Liu et al 2019), better sensitivity of unvested (long-term) compensation (Remesal 2018), and higher CFO bonus incentives tied to financial measures (Kroos et al 2018).…”

Section: Consequencesmentioning

confidence: 87%

“…Neoclassical principal agent theory (Ross 1973;Jensen and Meckling 1976;Tirole 1986;Eisenhardt 1989) is the most popular theoretical foundation in clawback research (e.g., Lin 2017;Erkens et al 2018;Liu et al 2020;Natarajan and Zheng 2019). Agency theory focuses on maximizing firm value (Jensen and Meckling 1976) based on the residual claim of principals' stocks and the assumption of homogeneous shareholder preferences (Fama and Jensen 1983).…”

Section: Theoretical and Normative Foundation 21 Principal Agent Theorymentioning

confidence: 99%

“…Kroos et al (2018) found that the positive link between clawbacks and CFO bonus PPS was mitigated by firms' susceptibility to misreporting (e.g., CEO power and lower financial expertise and prestige in the audit committee). According to Natarajan and Zheng (2019), powerful CEOs receive higher salaries, which are not subject to the SOX's mandatory clawback provisions. Lin (2017) stressed that the negative impact of clawbacks on overinvestments is strengthened by executive overconfidence.…”

Section: Moderator Variables Of Consequencesmentioning

confidence: 99%

See 2 more Smart Citations

Determinants and consequences of clawback provisions in management compensation contracts: a structured literature review on empirical evidence

Velte

2020

Bus Res

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The goal of this systematic literature review is to provide a detailed understanding of the determinants and consequences of clawback provisions in management compensation contracts, motivated by the increasing global regulatory, practical, and academic importance of implementing this new corporate governance tool. We identify 44 empirical (archival and experimental) studies on this topic and review them based on an agency-theoretical framework. Our review of empirical clawback research offers insights into this growing field and supports future researchers in developing new research questions. Our main results are as follows. First, we still know very little about the drivers of clawback adoption, as prior research concentrated on the consequences of clawback provisions. Second, many studies indicate that clawbacks lead to better earnings quality (reduced re-/misstatements), better pay-for-performance sensitivity, increased firm performance, greater value relevance, and lower overinvestment. While there are indications that clawbacks may serve an incentive-alignment function for managers, their contribution may be dependent on other corporate governance mechanisms, e.g. board composition, as significant moderators. We develop a research agenda with detailed recommendations for future research from methodological and content perspectives. We expect that the research activity in this field regarding the European capital market will increase in light of the EU shareholder rights Directive of 2017.

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Section: Consequencesmentioning

confidence: 87%

Section: Theoretical and Normative Foundation 21 Principal Agent Theorymentioning

confidence: 99%

Section: Moderator Variables Of Consequencesmentioning

confidence: 99%

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Determinants and consequences of clawback provisions in management compensation contracts: a structured literature review on empirical evidence

Velte

2020

Bus Res

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“…Conyon and He (2016) reported a negative influence of CEO equity-based compensation on fraud. CEO in-the-money-value also reduces restatements, moderated by clawback provisions (Natarajan and Zheng 2019). He (2015) found that CEO inside debt holdings cause decreased restatements.…”

Section: Ceo/cfo Compensationmentioning

confidence: 97%

The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research

Velte

2021

Manag Rev Q

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In this article, we review recent archival research articles (98 studies) on the impact of corporate governance on restatements, enforcement activities and fraud as corporate financial misconduct. Applying an agency-theoretical view, we mainly differentiate between four levels of corporate governance (group, individual, firm, and institutional level). We find that financial restatements on the one hand and the group and individual level of corporate governance on the other hand are dominant in our literature review. Enforcement actions and fraud events as misconduct proxies, and the firm and institutional level of corporate governance are of lower relevance yet. The following review highlights that many studies on corporate governance find inconclusive results on firms’ financial misconduct. But there are indications that board expertise and especially gender diversity in the top management decreases firms’ financial misconduct. We know very little about the impact of non-shareholder stakeholders’ monitoring role on misconduct yet. In discussing potential future research, we emphasize the need for a more detailed analysis of misconduct proxies, recognition of moderator and especially mediator variables, especially in the interplay of the board of directors and external auditors.

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“…Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act introduces rules requiring firms to further adopt and enforce clawback provisions in 2010. Prior research examines the effect of clawbacks on financial reporting quality, such as earnings management, and on the way executives are compensated (e.g., DeHaan et al 2013;Natarajan and Zheng 2019;Kroos et al 2018).…”

Section: Future Salary Revisionsmentioning

confidence: 99%

Ex Post Settling Up in Cash Compensation: New Evidence

Albuquerque

Chen

Dong

et al. 2019

Contemporary Accting Res

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This paper provides new evidence on whether and how boards solve costly ex post settling up to recover CEO cash compensation for unrealized gains that fail to materialize. Our analyses are motivated by the likely expanding role for ex post settling up as the risk of compensating executives for unrealized gains that may never materialize increases in a more intangibles‐based economy, as well as by the conflicting evidence of prior research. We provide evidence consistent with ex post settling up by (i) using alternative truncation methods to derive observations most likely to fall within the theoretically motivated incentive zone; (ii) replicating and reconciling the conflicting results of prior research that supports (Leone et al. 2006) and fails to support (Shaw and Zhang 2010) ex post settling up; (iii) using Incentive Lab data with contract‐specific information, allowing strong identification of observations in the incentive zone; and (iv) documenting predictable cross‐sectional variation, with ex post settling up being more pronounced for firms with stronger corporate governance, less conservative accounting earnings, and a larger proportion of total pay in the form of cash compensation. Overall, we conclude that evidence is strong in support of the ex post settling up hypothesis.

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Clawback Provision of SOX, Financial Misstatements, and CEO Compensation Contracts

Cited by 14 publications

References 32 publications

Determinants and consequences of clawback provisions in management compensation contracts: a structured literature review on empirical evidence

Determinants and consequences of clawback provisions in management compensation contracts: a structured literature review on empirical evidence

The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research

Ex Post Settling Up in Cash Compensation: New Evidence

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