Not all clawbacks are the same: Consequences of strong vs. weak clawback provisions

We develop a Clawback Strength Index and show that while some firms adopt unambiguous and strong clawback provisions, others adopt weak ones. We find that strong clawback adopters experience (a) improvements in financial reporting quality, (b) a decrease in the likelihood of CEO turnover, and (c) lower total and incentive-based CEO pay. We advance two possible explanations for our findings. On the one hand, clawback strength may be primarily responsible for the improvements in reporting quality. On the other hand, strong clawback provisions may yield benefits because they are part of a broader reform package. While our findings on financial reporting quality and CEO turnover are consistent with both explanations, our results on CEO pay support only the broader reform explanation.