Clawback Adoptions and Management Earnings Forecasts

We examine the relation between voluntary clawback adoptions in the US and firms' propensity to issue earnings forecasts and the frequency of such forecasts. We find that clawback adoptions are followed by an increase in the likelihood and frequency of managers issuing earnings forecasts. Further, we find this relation to hold only for firms with an actual increase in financial reporting quality following clawback adoption. We also observe a greater increase in the likelihood and frequency of management forecasts in the post-adoption period among adopters having higher ex-ante information asymmetry. Our results suggest that the improved financial reporting quality following clawback adoptions increases the verifiability (and credibility) of earnings forecasts making them more likely to be used. Our findings are of potential interest to regulators and investors in the US (and elsewhere) interested in the outcomes associated with clawback adoptions for firms' information environment. In particular, now that clawback adoptions are mandatory (SEC, 2022) our findings suggest that the benefits associated with clawback adoptions may be expected only for a subset of (rather than all) companies subject to the mandate.