The Effect of Mandatory Clawback Provisions on Corporate Innovation: Quasi-Experimental Evidence from China

ABSTRACT The clawback provisions adoption has received increasing attention in recent studies. Based on US setting, several studies find that voluntary clawback provisions may impede corporate innovation. Exploiting a policy experiment that requires SOEs to adopt mandatory clawback provisions in China, we find that adopting mandatory clawback provisions enhances corporate innovation. The cross-sectional tests show that the effect is stronger in firms with more related party transactions and in firms with less institutional investors, suggesting that improving corporate governance is a plausible channel through which clawback provisions affect corporate innovation. Overall, our study indicates that mandatory clawback provisions may play an active role in countries with weak corporate governance.