Comments on The Effects of Firminitiated Clawback Provisions

Comments on “The Effects of Firm-initiated Clawback Provisions on Bank Loan Contracting? Discussed by Wei-Ling Song Louisiana State University

Research Question and Empirical Strategy • Do firm-initiated clawback provisions enhance financial reporting quality, thereby reduce the information uncertainty faced by financing providers? • Use changes in the terms of bank loans to infer whether the effects can be attributed to improvement in financial reporting quality.

Main Findings • The study shows that clawback-adopting firms experience – a reduction in bank loan interest rates – loan maturity is lengthened – loan collateral is less likely – the number of financial covenants is increased.

Main Comments • Alternative explanation – Do clawback provisions change managers risktaking incentives? – If clawback provisions increase mangers’ risk aversion, then they may take safer investments. – In this case, lenders will reduce interest rates, extend loan maturities, require less collateral, and firms will opt for more financial covenants because of more stable earnings.

Main comments (Cont. ) • The test needs to distinguish these two possible explanations. – Increasing in information reporting quality – Reducing firm operational risk • Very challenging paper – Lenders care more about short-term earnings (whether borrowers can repay within the term of loans) than long-term growth of firms – Pleasing lenders may not be value optimizing.

Main comments (Cont. ) • Why do firms adopt clawback in the first place? What types of firms will have the highest incentives or benefits? • The most significant determinant is firm size – Inconsistent with information quality story • Try different information environment proxies – Earning forecast errors – Information opacity measure (Kim and Verrecchia, 2001, Accounting Review)

Other Comments • Analyze based on the types of loans in different regressions – Line of credit is very different from traditional term loans – Using revolver and institutional loan dummies is not enough – Loan facility mix may change – Structured finance and easy credit • Need to show loans by type, year, and clawback

Other Comments (Cont. ) • Show descriptive statistics by pre- and postclawback – Risk taking – Loan terms by type • Tables 3 -6 should include a dummy indicating post non-clawback firms. • Run endogenous switching model • Is peer-adoption a valid instrumental variable? – If it is a proxy for firm asset characteristic, then it may not be a valid IV.

Other Comments (Cont. ) • Is Post. Claw. High indicating only clawback adopters or including control firms (page 24 states both)? • If both, need to separate them and compare Post. Claw. High to Post. No. Claw. High • Very interesting paper, strongly recommended