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CHAPTER 5 SUMMARY AND CONCLUSIONS
I examine whether clawback provisions improve audit committees’ oversight effectiveness, and discuss the moderating effect of clawback provisions on the association between equity-based compensation and audit committees’ oversight failure. The major finding is that, when firms voluntarily adopt clawback provisions in the compensation contracts, the adverse effects of equity-based compensation will be decreased. The findings meet the prediction that the benefit of clawback provisions to audit committees’ oversight effectiveness, tested by the likelihood of restatements, the incidence of ICW, and the level of real earning management activities. I also find the moderating effects of clawback provision on CEOs’ action due to equity-based compensation.
Several potential implications of the findings should also interest regulators addressing issues related to compensation contracts and oversight effectiveness of audit committees.
This paper points to several directions for future research. Hennes et al. (2008) classifies restatements as either errors or irregularities and reports that market reaction to restatements due to irregularities is more negative than restatements due to errors. Brown et al. (2011) finds that only restatements resulting from irregularities are significantly related to the likelihood of adopting fraud-based clawback provisions. I further consider separately restatements resulting from irregularities and errors, and therefore, future research might examine the relation between the adoption of clawback provisions and restatements types.
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