Comments on “The Effects of Firm-initiated Clawback Provisions on Bank

Loan Contracting?

Discussed by Wei-Ling SongLouisiana 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 risk-

taking 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 post-clawback– 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 PostClawHigh indicating only clawback adopters or including control firms (page 24 states both)?

• If both, need to separate them and compare PostClawHigh to PostNoClawHigh

• Very interesting paper, strongly recommended