Recovering Bonuses After Restated Financials: Adopting Clawback Provisions

Abstract

We investigate the emergence of provisions to recover bonuses made in the event of restated financials. These provisions are sometimes termed 'clawbacks.' Errant financial statements, and associated bonuses, have made headlines and the SEC recently changed Regulation S-K to require that compensation committees disclose their policies regarding bonus recovery in the event of errant financial statements. Some, but not all, companies quickly developed policies to recover (clawback) bonuses. We construct an index of the relative influence of management and independent monitoring on governance. We find that management influence (reflected as a low index) makes a clawback provision less likely. On the other hand, more independent monitoring (as reflected in a high index) increases the likelihood of a company adopting a clawback provision. Higher noise in the accounting system makes a clawback less likely and if the risk of restatements has been high recently then a clawback provision is more likely. Accounting conservatism does not appear to be a factor in the presence or absence of clawback provisions.