The Role of Convex Equity Incentives in Managers’ Forecasting Decisions

52 Pages Posted: 17 Oct 2020

See all articles by Young Jun Cho

Young Jun Cho

Singapore Management University - School of Accountancy

David Tsui

University of Southern California - Marshall School of Business

Holly Yang

Singapore Management University - School of Accountancy

Date Written: May 28, 2020

Abstract

Prior literature suggests that voluntary disclosures of forward-looking information tend to lead to capital market benefits, but these disclosures may also result in negative capital market consequences if subsequent performance falls below expectations. We therefore hypothesize that convex equity incentives, which reward managers for stock price gains while limiting their exposure to losses, should promote greater voluntary forward-looking disclosure. Consistent with our hypothesis, we document a significantly positive association between equity incentive convexity and forecast issuance and frequency. This result is robust to a change specification, an instrumental variable approach, and CEO or CEO-firm fixed effects. Our study suggests that the risks arising from providing voluntary disclosures are important considerations in managers’ disclosure decisions.

Keywords: voluntary disclosure; earnings guidance; managerial incentives; disclosure risks

JEL Classification: M41

Suggested Citation

Cho, Young Jun and Tsui, David and Yang, Holly, The Role of Convex Equity Incentives in Managers’ Forecasting Decisions (May 28, 2020). Singapore Management University School of Accountancy Research Paper No. 2021-125, Available at SSRN: https://ssrn.com/abstract=3682412 or http://dx.doi.org/10.2139/ssrn.3682412

Young Jun Cho

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore

David Tsui

University of Southern California - Marshall School of Business ( email )

3660 Trousdale Parkway
Los Angeles, CA 90089
United States

Holly Yang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://sites.google.com/site/holly0417phd/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
82
Abstract Views
518
rank
361,092
PlumX Metrics