Executive Compensation and Analyst Coverage

• In Event: Research Paper Session—FARS-1

Abstract

Prior research finds that executives’ equity incentives exhibit a positive statistical association with accounting manipulation, and that option-based compensation induces CEO’s incentives to take excessively risky investments. Bonus-maximization hypothesis also suggests that managers make discretionary accrual decisions to maximize their short-term bonuses. Study also finds that when past performance is high, the principal can provide a continuing agent with a higher salary and a less high-powered bonus, and current salary is predictive of future performance after controlling for contemporaneous and past performance. On the other hand, the private information hypothesis suggests that analysts drop their coverage because of their access to management’s private negative information about a firm’s prospects. In this paper, I investigate whether performance-based compensation (equity incentive and bonus) can provide a source of private information which analysts consider when they make their coverage decisions.

Author

• Xiaosi Liu, Kent State University