Abstract
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.
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