Trust and Trustworthiness in the Executive Compensation Policy Required By the Dodd-Frank Act: an Experimental Study
type: CreativeWork
description: As a result of failing financial markets, rampant managerial abuse of shareholder return through grossly unfair compensation packages and shareholder outrage at corporate governance apathy, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July of 2010. Two major provisions contained within the Dodd-Frank legislation are say-on-pay and clawbacks of bonus compensation. This research utilizes a trust game and experimental economics methodologies to test the relative influence of say on pay and clawbacks of bonus compensation on shareholder trust and manager trustworthiness. Results show that shareholders are more likely to participate in the investment process if they feel they have a voice in that process AND are comfortable that managers can be trusted to act responsibly. Likewise, managers were more trustworthy (i.e. returned something to shareholders) a higher percentage of the time when the clawback was in place. Also, manager offers were shown to be lower when there was a penalty for misreporting. This finding suggests that the policy requiring a penalty for financial restatements is a strong incentive for managers to be conservative in their reporting of financial data. Finally, managers did not make offers which were significantly different from what they thought was fair. However, ACTUAL RETURN was, in general, statistically lower than what either managers or shareholders considered to be a fair return. Differences between actual return and shareholder perception of fairness were particularly striking in the "no-penalty" conditions such that the difference between actual and fair return was statistically significant regardless of treatment condition. However, the evidence does suggest that the clawback mitigates this inequity to some extent.
abstract: As a result of failing financial markets, rampant managerial abuse of shareholder return through grossly unfair compensation packages and shareholder outrage at corporate governance apathy, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July of 2010. Two major provisions contained within the Dodd-Frank legislation are say-on-pay and clawbacks of bonus compensation. This research utilizes a trust game and experimental economics methodologies to test the relative influence of say on pay and clawbacks of bonus compensation on shareholder trust and manager trustworthiness. Results show that shareholders are more likely to participate in the investment process if they feel they have a voice in that process AND are comfortable that managers can be trusted to act responsibly. Likewise, managers were more trustworthy (i.e. returned something to shareholders) a higher percentage of the time when the clawback was in place. Also, manager offers were shown to be lower when there was a penalty for misreporting. This finding suggests that the policy requiring a penalty for financial restatements is a strong incentive for managers to be conservative in their reporting of financial data. Finally, managers did not make offers which were significantly different from what they thought was fair. However, ACTUAL RETURN was, in general, statistically lower than what either managers or shareholders considered to be a fair return. Differences between actual return and shareholder perception of fairness were particularly striking in the "no-penalty" conditions such that the difference between actual and fair return was statistically significant regardless of treatment condition. However, the evidence does suggest that the clawback mitigates this inequity to some extent.
author: Hart, Dana L.
keywords: Clawbacks, Executive Compensation, Game Theory, Say On Pay, Trust, Trustworthiness, Accounting
date published: 2012-01-01T08:00:00Z
date modified: 2026-07-24T03:05:15Z
provider: University of Mississippi
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: University of Mississippi