The Effects of the Clawback Provision on the Asymmetric Sensitivity of CEO Bonus to Earnings


Project Summary:

Section 304 of the Sarbanes-Oxley Act of 2002 (SOX) sets forth a clawback provision that enables a publicly traded company to recover bonuses and other performance-based compensation from the chief executive officers (CEOs) if their company is required to restate financial statements due to material noncomplicances, as a result of misconduct, with financial reporting requirements under the security laws. In this paper we examine the effect of regulatory changes on the sensitivity of CEO bonus to earnings in the cases of good news and bad news in the periods before and after SOX. We find that asymmetric sensitivity of bonus to earnings exists before SOX but disappears in the post-SOX period. This is consistent with the reduced impact of settling up problems due to the clawback provision. This finding shows that regulatory changes affect compensation contracts and has implications for regulators, managers, politicians, investors, and academics in their assessment of the equitable relationship between executive efforts and executive bonus compensation.

Project Description:

Project Type:
Self-Funded

Project Role:
Co-Author

Country 1:
Canada

Country 2:
United States

Country 3:
United States

Country 4:

Month
Year
Start Date:
May
2015
End Date:

Funder:

Year Project Started:
2015

Collaborator:
Professors Jennifer Yin and Gordian Ndubizu

Collaborator Institution:
University of Texas at San Antonio and Drexel University

Collaborator Role:
co-authors

Funder
Amount
(e.g type 1000 for 1,000)
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