New Study by Hamed Mahmudi: Mandatory Clawbacks May Add Firm Value

Center News, Scholarship

More Exciting Scholarship from Professor Mahmud

The Weinberg Center is pleased to congratulate our distinguished Lerner College colleague, Hamed Mahmudi, on his latest paper, soon to be published in the Journal of Law and Economics, a leading publication from the University of Chicago. Hamed, a prolific and influential scholar, has made significant contributions to the study of corporate governance practices and debates.

In his latest, Hamed, along with co-authors Tor-Erik Bakke (University of Illinois) and Aazam Virani (University of Arizona), delves into the far-reaching implications of the SEC’s 2022 mandate requiring companies to adopt clawback provisions for executive compensation. This research rigorously examines how such provisions—designed to enable firms to recover performance-based compensation when financial misstatements occur—impact firm value and whether regulatory mandates of this nature benefit shareholders.

The study contributes to the ongoing debate over whether governance measures should be left to firms to decide (the “private ordering” view) or enforced through regulation (the “agency problem” view). This discussion is central to some of the most prominent voices in the field, including  scholars such as Lucian Bebchuk and Jesse Fried (Harvard), Sanjai Baghat (Colorado), Paul Gompers (Harvard), and David Larcker (Stanford).

Focusing on the SEC’s 2015 announcement of proposed rules under the Dodd-Frank Act—just prior to the 2022 mandate—this paper investigates how market participants responded to the uncertainty surrounding these provisions.

Key findings include:

• Firms without a clawback provision in place before the SEC’s announcement saw a positive boost in firm value, with an average increase of $38.6 million, suggesting that mandatory clawbacks can enhance shareholder value.
• The evidence indicates that firms most likely to benefit from mandatory clawbacks include those with powerful management and weak boards, higher CEO compensation tied to bonuses, and lower audit quality. On the other hand, high-growth firms with volatile cash flows or substantial R&D investments may be less likely to benefit, as such measures could reduce risk-taking or innovation.
• Overall, these findings support the notion that governance regulations can increase firm value in certain cases. The study suggests that mandatory clawbacks could lead to better financial reporting and improve corporate governance.