The Effect of Clawback on Managerial Use of Expectations Management and Market Consequences



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Since 2007, voluntary adoption of compensation Clawback provisions has grown prevalent among U.S. listed firms. By 2014, approximately 50% of Russell 3000 firms had adopted such policies. Clawback provisions allow adopting firms to recoup incentive-based compensation paid to executives if misstatements in prior financial reports are later discovered. Researchers assert that Clawbacks could impose unintended consequences on adopting firms. I contribute to this argument by providing empirical evidence that Clawback firms are more likely to issue downward earnings guidance to lower analysts-set earnings goals. This is consistent with the notion that Clawback adoptions encourage managers to use methods other than accruals management to achieve earnings goals without risking triggering a Clawback. I also find a significantly weaker market reaction to downward guidance issuance and earnings surprises announcements post-Clawback. These results are robust to controlling for the decision to adopt a Clawback provision voluntarily. Overall, my findings suggest that although the stock market provides less pressure to meet earnings goals post-Clawback, opportunistic managers continue to fixate on playing the “numbers game” and they do so by managing analyst expectations.



Compensation Clawback Provisions, Earnings Guidance, Stock Returns