Federal regulation makes companies more honest

By Alexandra Richter

BUFFALO, N.Y. — A new U.S. Securities and Exchange Commission regulation aimed at curbing CEO pay is prompting companies to strengthen their financial reporting, according to new research from the University at Buffalo School of Management.

In October 2022, the SEC created Exchange Rule 10D-1, which requires all firms listed on major stock exchanges to have a written plan for recovering executive compensation if the company’s financial reports are found to be inaccurate. The study, posted on the Social Science Research Network (SSRN), explores how the rule, which took place after more than a decade of debate, has prompted companies to respond by improving transparency, hiring more accountants and paying higher audit fees to ensure accuracy, while resisting the urge to inflate executive pay.

“The requirement to recover executive pay in the event of an accounting restatement — known as a clawback provision — is a contentious regulatory policy,” says study co-author, Michael Dambra, PhD, associate professor and Kenneth W. Colwell Chair of Accounting and Law in the UB School of Management. “But rather than inflating CEO salaries to offset the risk, firms responded by investing in stronger financial reporting systems.”

To assess the rule’s impact on corporate behavior, the researchers compared companies required to adopt the new SEC regulation with those that had already done so voluntarily before the mandate. They tracked data on accounting staff, audit costs, reporting speed, CEO pay structures and analyst coverage.

The findings show mandatory clawback adoption has improved corporate reporting and accountability, while attracting more analyst attention, signaling greater investor trust.

“Our findings should ease regulators’ fears about costly side effects,” says Dambra. “And, we found that some firms tied more of CEO pay to performance-based measures subject to clawback — directly challenging the narrative that regulation always pushes executive pay higher.”

The study offers timely evidence as the SEC re-evaluates its executive compensation rules.

Dambra collaborated on the study with Andrea Pawliczek, PhD, assistant professor of accounting, and Bryce Schonberger, PhD, assistant professor of accounting, both from the University of Colorado at Boulder Leeds School of Business.