Executive Equity Compensation and Corporate Disclosure: Do Managers Protect their Compensation Payout?

• In Event: Management Accounting

Abstract

We examine the relation between executive equity compensation and firm disclosure activities. Specifically, we propose that differences in downside risk tolerance provide executives with distinct incentives to protect their compensation payout. Consistent with our expectation that earnings forecasts allow managers to influence firm stock price and thus maximize the realized value of their equity compensation, we find that riskier equity compensation is associated with greater likelihood to issue earnings forecasts as well as greater frequency. For a subsample of firms which offer contacts with higher downside risk protection, we document that the differential impact of riskier equity compensation is muted. Overall, these results support efficient contracting theory as they suggest that riskier compensation motivates managers to increase corporate disclosures.

Authors

• Marina Y. Ruseva, Lamar University

• Emrah Ekici, University of Wisconsin-Eau Claire