Defense Date
2015
Degree Type
Dissertation
Degree Name
Business Administration
Department
Business Administration
Committee Chair/First Advisor
Dr. Divesh Sharma
Committee Member or Co-Chair
Dr. Dana Hermanson
Committee Member
Dr. John Abernathy
Abstract
This study examines the association between director characteristics and the severity of voluntary compensation clawback policy (CCP). Specifically, I examine the relations between director independence and director expertise, and CCP severity. However, a CEO’s influence on director appointments and the compensation structure of directors are potential factors that can affect a director’s independence from management and reduce the effectiveness of board and board committee experts. Accordingly, I also examine how a CEO’s influence on director appointments and the compensation structure of directors are related to CCP severity. I examine the direct effect of these factors, as well as how these factors moderate the relation between director characteristics and CCP severity. The emerging empirical CCP literature suggests that firms that voluntarily adopted CCPs experienced improved financial reporting quality in the periods following a CCP adoption, and therefore Dodd-Frank clawback mandate would be expected to lead to a better financial reporting environment. Further, the emerging CCP literature suggests that boards of directors are primarily responsible for voluntary CCP adoption, and will be responsible for the design details of the Dodd-Frank mandated CCPs. However, anecdotal evidence suggests that firms with voluntary CCP rarely invoke the CCP provision after issuing an Item 4.02 non-reliance financial restatement. This suggests board-adopted CCPs may not be severe enough to deter executives from producing misleading financial statements, as the executives perceive the CCP may not be enforceable. However, existing CCP studies generally focus on whether a firm voluntarily adopts a CCP or not (form), and largely ignore variations in the content of the CCP (substance). There may be substantial differences in the content (substance) of CCPs that makes the application of the CCP difficult after a financial restatement. The present study performs content analyses of CCPs that firms adopted during the voluntary adoption period and develops a CCP severity index that represents the degree to which a CCP is expected to deter financial misreporting. I then examine how director characteristics, director compensation size and mix, and CEO influence on director appointments are related to this CCP severity index. At the overall board level, I find a positive association between board of director independence and the CCP severity, and a negative association between measures of CEO influence on director appointment and the CCP severity. Moreover, I find that CEO influence on director appointment reduces the positive relationship between director independence and the CCP severity. Regarding board of director compensation structure, I find that higher cash and higher stock awards in the compensation structure of directors are positively associated with the CCP severity, and higher stock options in the compensation structure of directors are negatively associated with the CCP severity. Moreover, I find that higher stock options in the compensation structure of directors reduces the positive relationship between board of director independence and the CCP severity. The board level results are robust to several additional tests. At the compensation committee of the board level, I find that compensation committee director governance expertise is positively associated with the CCP severity. Moreover, I find that CEO influence on the appointment of directors to the compensation committee is negatively associated with the CCP severity, and reduces the benefits of compensation committee director governance expertise on the design of the CCP. Moreover, similar to the findings at the overall board level, I find that higher stock awards (stock options) in the compensation structure of compensation committee directors is positively (negatively) associated with the CCP severity. Additionally, I find that the extent of stock options in the compensation structure of compensation committee directors reduces the positive relationship between compensation committee director governance expertise and the CCP severity. The results suggest that CEO influence on director appointment and director compensation comprised more of stock options, as opposed to cash and stock awards, may be influencing the objectivity of directors on the board and on the compensation committee of the board in relation to CCP severity to deter financial misreporting. The results also suggest that independent directors may voluntarily adopt a CCP in form, but the content of the CCP may not be severe enough to deter firm executives from producing misleading financial statements. Moreover, the results also suggest the National Association of Corporate Directors’ recommendation (NACD, 2001) regarding outside director equity compensation may need to distinguish between stock awards equity compensation and stock options equity compensation because whereas stock awards have positive incentive effect, stock options have negative incentive effect. Additionally, findings from this study suggest that studies examining effects of CCP adoption on financial reporting quality and audit quality need to consider how CEO influence on director appointment and the compensation structure of directors may influence the results.