Clawback Enforcement, Executive Pay, and Accounting Manipulation
Clawback provisions entitle shareholders to recover previously awarded incentive compensation from managers involved in accounting manipulation or misconduct. I study theoretically and empirically the impact of clawback provisions on the horizon of executive pay when shareholders face clawback enforcement frictions. In a principal agent model, I show that strong clawback enforcement reduces the need for long term compensation to avoid the manager's manipulation incentives. However, clawback adoption may be attached to an increase in long term compensation if clawback enforcement is weak. The model shows that weak enforcement hinders the effectiveness of clawbacks, but firms may voluntarily complement these provisions with a lengthening of the pay horizon. Empirical tests using samples of propensity score matched firms provide support to the model's mechanisms.