To deter financial misstatements, many companies have recently adopted compensation recovery policies – commonly known as “clawbacks” – that authorize the board to recoup compensation paid to executives based on misstated financial reports. Clawbacks have been shown to reduce financial...

While firm-initiated compensation recovery (or clawback) provisions are gaining popularity and the recently enacted Dodd-Frank Act seeks to make the clawback of erroneously awarded compensation mandatory for all listed companies, little is known about their effectiveness. We find that the...

Although firm-initiated clawbacks reduce accounting manipulation, they also induce managers to engage in sub-optimal activities (e.g., reduce R&D) to achieve earnings targets. To assess the effectiveness of clawback provisions, we examine their impact from debtholders' point of view. We find...