Managers’ Pay Duration and Voluntary Disclosures

• In Event: Executive Compensation

Abstract

In this paper, we examine the impact of managers’ pay duration on voluntary disclosures. Pay duration refers to the average period that it takes for managers’ annual compensation to vest. We hypothesize that pay duration can incentivize managers to provide more disclosures by better aligning their interest with shareholders’. Consistent with our prediction, we find that after controlling for the magnitude of stock-based compensation, managers with longer pay duration are more likely to issue earnings forecasts and issue forecasts more frequently, particularly bad news forecasts and long-run forecasts. In addition, we find that the impact of pay duration on disclosures is more pronounced for firms with less transparent information environment and for firms with lower institutional ownership where the marginal effect of additional disclosures is larger. Additional analyses also indicate that managers with longer pay duration issue more accurate earnings forecasts. Overall, our paper contributes to the literature by documenting that lengthening the vesting periods of managers’ compensation can induce managers to be more forthcoming.

Authors

• Qiang Cheng, Singapore Management University

• Young Jun Cho, Singapore Management University

• Jae Bum Kim, Singapore Management University