Clawback Policy Performance and Corporate Reporting Outcomes
Baban Eulaiwi

Curtin University

Abstract

We investigate the relationship between the effectiveness of a remuneration clawback policy, a policy designed to retract some level of compensation paid to key management personnel in the event of misreporting conduct, and financial reporting outcomes in a large sample of Australian listed firms over the 2008-2022 period. Consistent with agency theory and power circulation theory, we provide evidence that firms which implement a clawback policy have lower levels of accrual-based earnings management. This negative association is more pronounced when the firm^s internal audit department reports directly to the board^s audit committee, and in firms^ where there has been media scrutiny relating to level of compensation of key management personnel. Moreover, when shareholders have voted on executive compensation under the two-strikes rule, this action magnifies the negative association between clawback policy performance and corporate reporting outcomes. Our results are robust to a battery of additional tests including propensity score matching.

Keywords: clawback- accruals, internal audit, two-strikes rule

Topic: Financial accounting