Clawback provision adoption, corporate governance, and investment decisions

Abstract

AbstractWe examine the effect of corporate governance on the likelihood of clawback provision adoption, and its consequences in terms of corporate investment practices and risk‐taking behavior. We find that firms with strong governance (as proxied by board independence, diligence, and size) are positively associated with the firm's adoption of a clawback provision; whereas firms with weak governance (as proxied by management entrenchment, i.e., CEO duality status and tenure) are negatively associated with clawback provision adoption. Using the propensity‐score matching, difference‐in‐differences research design, and inverse Mills ratio to mitigate omitted variables and self‐selection biases, we find that after adopting a clawback provision, firms’ abnormal investment decreases and the firms’ investments are less risky.