Clawback Adoptions, Managerial Compensation Incentives, Capital Investment Mix and Efficiency

Abstract

We present evidence that managerial responses to voluntary clawback adoptions depend on compensation incentives that can induce capital investment mix shifts and reduce capital investment efficiency. Specifically, we find that managers incentivized by high levels of performance-based pay and equity-linked compensation respond to clawback adoptions by shifting capital investments away from R&D and toward capex, thereby lowering capital investment efficiency and contravening purported financial reporting quality and investment efficiency benefits found previously for clawback adoptions. These findings, which are robust to alternative explanations, extend prior evidence by documenting managerial compensation incentives as a channel by which clawback adoptions can influence capital investment mix and capital investment efficiency. These findings are also timely given pending SEC Rule 10D-1 that would make clawback provisions a pre-condition for U.S. exchange listing and which explicitly requests “comment on any effect the proposed requirements may have on efficiency, competition and capital formation” (SEC 2015, 103-104).