The Valuation Effect and Consequences of Clawback Adoption in Real Estate Investment Trusts

This study explored the valuation effect of clawback adoption in the REIT market and identified possible channels through which clawback may generate benefits to REITs. We first found that the stock market reacts positively to the announcement of clawback adoption, and that market response is more pronounced when the clawback policy is strong, based on a sample of initial clawback adoptions in REITs between 2007 and 2018. The valuation effect of clawback adoption is stronger among those REITs with higher likelihood of restatements and greater disclosure opacity prior to adoption, suggesting that REIT investors anticipate that the adopted clawbacks will reduce financial restatement risks and improve disclosure quality. Our further analysis found that clawback adoption reduces the chance that REITs will receive comment letters from the regulator, improve financial reporting readability and decrease investment aggressiveness in REITs. Compared with weak clawback adopters, strong adopters have lower incidences of financial restatements in the post-adoption period. Our findings indicate that clawback is a value-relevant corporate governance mechanism in REITs.