“Do Clawbacks Lower Capital Investment Efficiency?” by Professor Gary BIDDLE
Professor Gary BIDDLE
Professor, Chair of Accounting
School of Business
The University of Hong Kong
Clawback clauses adopted to enhance financial reporting quality should enhance capital investment efficiency. Yet no direct evidence exists. Moreover, clawback adoptions may motivate managers to take countervailing actions to preserve expected compensation. Chan et al.’s (2015) finding that clawback adoptions induce managers to forego R&D investments to preserve earnings begs whether clawbacks, despite enhancing reporting quality, have the unintended consequence of lowering capital investment efficiency. Based on a propensity-matched sample of 9,268 firm-years for 936 U.S. clawback adopters and non-adopters, this study documents associations between clawback adoptions, capital investments and capital investment efficiency changes consistent with compensation incentives. Specifically, we find that clawback adoptions relate positively with next-period capital investments for firms with available cash and that these associations are stronger for acquisition than for capital expenditure and R&D investments with negative or delayed earnings paybacks. Restatements prior to clawback adoptions are found to mitigate these associations consistent with closer board monitoring with further corroborative evidence provided by deviations from expected investments. These findings consistent with clawback adoptions inducing lower capital investment efficiency are timely to a pending SEC proposal to make clawback provisions a pre-condition for U.S. exchange listings.