Clawing Back Executive Compensation

We explore whether clawback provisions (i.e. Dodd-Frank and SOX) can mitigate agency problems by deterring the executives from manipulating earnings in an effort to boost their incentive compensation. We estimate the direct and indirect gains executives receive as a result of manipulating earnings and compare the amount potentially recoverable under each clawback provision. We show that the Dodd-Frank Clawback can potentially recover a large portion of the direct gains from misreporting (i.e., “excess incentive compensation” as defined by Dodd-Frank); however, significantly larger indirect gains (e.g. profits from the sale of stock and option exercise, gains from delayed termination) are not subject to clawback under Dodd-Frank. Neither the Dodd Frank nor the SOX clawback provision captures the benefits CEOs obtain from delayed termination. Our results suggest existing clawback legislation may not be sufficient to reduce agency problems and curb earnings manipulations.