Explaining combined incentive contracts’ choices: Clawback contracts

Subject Areas : Management Accounting

Sasan Mehrani ¹ (Associate Professor in Accounting, University of Tehran, Iran)
Mohsen Motmaen ² (Ph. D of Accounting, University of Tehran, Iran.)

Received: 2017-06-23 Accepted : 2017-12-22 Published : 2018-06-22

Keywords: loss aversion, clawback contracts, management accounting, framing,

Abstract :

This study explains the individual’s behavior toward profits and losses contained in differently framed combined incentive contracts. Individual’s risk preferences and loss preferences are measured using Holt and Laury (2002) measure of risk aversion and Brink and Rankin (2013) measure of loss aversion, respectively. The last measure was adjusted with compensation characteristics in Iran. The relationship between these preferences and individual’s behavior under economically equivalent contracts of different frames is examined using experiment. Participating 92 subjects as well as conducting four separate experiments, the result indicated that there is a negative relationship between loss aversion and accepatance of contracts which have penalty component. Also, subjects preferred the first clawback contract (bonus>penalty) rather than the second clawback contract (bonus<penalty). In other words, contracts framing as well as endowment effect play a vital role in individual choices. Failure of common economic theories in explaining of individual behavior is confirmed in this study.

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