The role of convex equity incentives in managers’ forecasting decisions

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...

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Main Authors: CHO, Young Jun, TSUI, David, YANG, Holly I.
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2021
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Online Access:https://ink.library.smu.edu.sg/soa_research/1938
https://ink.library.smu.edu.sg/context/soa_research/article/2965/viewcontent/CTY_03_29_21.pdf
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spelling sg-smu-ink.soa_research-29652022-07-07T06:40:04Z The role of convex equity incentives in managers’ forecasting decisions CHO, Young Jun TSUI, David YANG, Holly I. 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 find a significantly positive association between equity incentive convexity and forecast issuance and frequency. We also find that the positive association is more pronounced for firms with higher sales volatility and managers with shorter tenure, in which cases managers are more concerned with missing their own forecasts. Our study suggests that the risks arising from providing voluntary disclosures are important considerations in managers’ disclosure decisions. 2021-04-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soa_research/1938 info:doi/10.2308/JFR-2020-009 https://ink.library.smu.edu.sg/context/soa_research/article/2965/viewcontent/CTY_03_29_21.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University voluntary disclosure earnings guidance managerial incentives disclosure risks Accounting Corporate Finance
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic voluntary disclosure
earnings guidance
managerial incentives
disclosure risks
Accounting
Corporate Finance
spellingShingle voluntary disclosure
earnings guidance
managerial incentives
disclosure risks
Accounting
Corporate Finance
CHO, Young Jun
TSUI, David
YANG, Holly I.
The role of convex equity incentives in managers’ forecasting decisions
description 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 find a significantly positive association between equity incentive convexity and forecast issuance and frequency. We also find that the positive association is more pronounced for firms with higher sales volatility and managers with shorter tenure, in which cases managers are more concerned with missing their own forecasts. Our study suggests that the risks arising from providing voluntary disclosures are important considerations in managers’ disclosure decisions.
format text
author CHO, Young Jun
TSUI, David
YANG, Holly I.
author_facet CHO, Young Jun
TSUI, David
YANG, Holly I.
author_sort CHO, Young Jun
title The role of convex equity incentives in managers’ forecasting decisions
title_short The role of convex equity incentives in managers’ forecasting decisions
title_full The role of convex equity incentives in managers’ forecasting decisions
title_fullStr The role of convex equity incentives in managers’ forecasting decisions
title_full_unstemmed The role of convex equity incentives in managers’ forecasting decisions
title_sort role of convex equity incentives in managers’ forecasting decisions
publisher Institutional Knowledge at Singapore Management University
publishDate 2021
url https://ink.library.smu.edu.sg/soa_research/1938
https://ink.library.smu.edu.sg/context/soa_research/article/2965/viewcontent/CTY_03_29_21.pdf
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