Dancing in Shackles: Clawback and corporate innovation

Abstract

This paper examines how clawback provisions, as an ex-post penalty scheme, affect corporate innovation intensity and strategies. On the one hand, innovation activities decline after clawback adoptions. On the other hand, clawback adopters tend to conduct fewer exploitative innovations but more exploratory innovations. These results hold for both voluntary clawback adoptions and mandatory clawback adoptions. The results support the capital market pressure hypothesis, which posits that after clawback adoption, managers become more careful about research and development spending and shift to exploratory innovations to meet capital markets’ expectations.