Corporate Governance and Executive Compensation in Firms with Clawback Provisions

Date
2020
Authors
Ross, Stephanie
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Abstract

Clawbacks are provisions that allow firms to recover executive compensation based on prior earnings that are found to be materially misstated due to misconduct or negligence of fiduciary duty (Babenko et al. 2017). The inclusion of these provisions in compensation contracts increase the risk imposed on executives. Standard agency theory predicts that the executives will demand higher compensation when clawback provisions are implemented to balance out the effect of the additional risks imposed on their wealth (Prendergast 1999; deHaan et al. 2013). In my dissertation, I examine the following: 1) the internal and external dimensions of corporate governance that can impact the decision to adopt a clawback provision, 2) the effect of clawback provisions on CEO/CFO compensation components, including incentive-based variables (i.e., delta and vega), 3) the changes in CEO and CFO compensation conditional on corporate governance and CEO and CFO power as a result of the presence of a clawback provision and 4) the vesting terms embedded in CEO and CFO equity-based compensation (options and shares) as a result of the presence of a clawback provision. This dissertation extends the literature by examining governance mechanisms, CEO/CFO compensation, CEO/CFO power and vesting elements in clawback adopted firms. To my knowledge, a thorough examination of these four elements have not been conducted in relation to clawback provisions.

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Department
Accounting