Are Managers “Paid” for Exploiting Investors’ Limited Attention in Financial Disclosures?

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Abstract

This study investigates whether managers increase their cash compensation by strategically exploiting investors limited attention in financial disclosures. Using a measure derived from the strategic language usage across the disclosure outlets with different levels of visibility, we hypothesize and find that the changes in CEOs’ and CFOs’ cash compensation are positively associated with the change in the tone differences between third-quarter earnings press release and the corresponding MD&As in the 10-Q filings. We also find that the relation is stronger for firms whose board monitoring is less effective. Our findings provide evidence that managers could directly increase their compensation through strategic disclosure practices. In addition, strong board monitoring is crucial for constraining the opportunistic managerial behavior.

Authors

• Lijun Lei, Virginia Polytechnic Institute and State University

• Qianzhou Du, Virginia Tech

• Weiguo Fan, Virginia Tech University