Compensation clawback policies and corporate lawsuits
Journal of Financial Regulation and Compliance
ISSN: 1358-1988
Article publication date: 6 March 2019
Issue publication date: 11 March 2019
Abstract
Purpose
The purpose of this paper is to study the relation between compensation clawbacks and lawsuits and analyze how these two corporate disciplinary forces interact. This paper hypothesizes that by allowing firms to recoup compensation from managers who breach their fiduciary duty, clawbacks provide a form of discipline that potentially reduces the likelihood of managerial wrongdoing, which, in turn, lowers the risk of corporate lawsuits.
Design/methodology/approach
This paper identifies whether or not a company in the S&P 1500 had a clawback policy between 2007 and 2014 by searching the company filings and press releases. The authors also construct different proxies for litigation risk and lawsuit outcomes using the Audit Analytics Database. They then perform a variety of empirical tests to examine the association between clawbacks and litigation risk and the association between clawbacks and litigation outcomes.
Findings
This paper finds that firms with higher litigation risk are more likely to adopt a clawback policy. In addition, after the adoption of clawback provisions, litigation risk significantly declines, suggesting that clawback policies are effective in reducing the likelihood of corporate lawsuits. Furthermore, firms with clawback policies are approximately 50 per cent more likely to have lawsuits against them dismissed or settled for lower amounts (approximately 12 per cent lower).
Practical implications
The findings of this paper provide insights to the efficacy of a current change in compensation regulation, the mandatory clawback adoption requirement by the Dodd–Frank Act of 2010.
Originality/value
This paper contributes to the literature on both clawbacks and litigation, as it is the first to analyze the relation between the two.
Keywords
Acknowledgements
The authors would like to thank two anonymous referees, John Ashton (the editor), Patty Bick and participants of the 2017 Annual Meeting of the Financial Management Association for helpful comments and suggestions. They thank Victoria Fasi for valuable research assistance. This research was supported in part by the Marquette University Miles grant.
Citation
Arena, M.P. and Nguyen, N.Q. (2019), "Compensation clawback policies and corporate lawsuits", Journal of Financial Regulation and Compliance, Vol. 27 No. 1, pp. 70-85. https://doi.org/10.1108/JFRC-10-2017-0081
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited