Management Risk Incentives and the Readability of Corporate Disclosures
Financial Management, Forthcoming
54 Pages Posted: 9 Feb 2014 Last revised: 11 Feb 2021
Date Written: November 12, 2017
Managers with higher risk incentives (greater options vega) issue less readable disclosures. Those in the top-quartile of vega file annual reports that are about 15.4% more voluminous than the filings of bottom-quartile-vega managers. The effect of vega on obfuscation remains after controlling for firm risk, operating complexities, accounting and auditor choices, CEO changes, and an exogenous shock to option compensation. This effect is tempered by higher institutional ownership, lower management entrenchment, and greater analyst following. Obfuscation benefits managers by increasing return volatility (option value) and allowing greater earnings management. These findings uncover a new link between options and disclosure transparency.
Keywords: Executive Compensation; Disclosure Obfuscation; Option Vega; Textual Analysis
JEL Classification: G12, G14, G30, M4, M52
Suggested Citation: Suggested Citation