Deng, X. D., Lee, Y. T., & Qiao, Z. (2018). Dancing with Shackles On: Compensation Recovery and Corporate Investment.


Discipline: Finance


We examine how clawback provisions, as an ex-post penalty scheme, affect corporate investment strategies. On the one hand, we show one unintended consequence of clawback provisions that future output level of innovative activities declines. On the other hand, we find that clawback provisions improve the output quality of innovative activities. In addition, we employ a difference-in-difference approach depending on the imposition of clawback policy in the section 954 of the Dodd-Frank Act. Finally, we use mergers and acquisitions (M&As) as an alternative corporate investment decision and find consistent results that clawback provisions reduce the frequency of deals but increase their market announcement returns. Overall, with clawback provisions, executives become more prudent and invest more cautiously, leading to lower investment levels but higher investment quality.