Are Earnings Forecasts Informed by Proxy Statement Compensation Disclosures?

Stephannie A. Larocque; Melissa A. Martin; Beverly R. Walther

doi:10.1111/1911-3846.12559

Are Earnings Forecasts Informed by Proxy Statement Compensation Disclosures?

Stephannie A. Larocque^*, Melissa A. Martin, Beverly R. Walther

^*Corresponding author for this work

Accounting Information and Management

Research output: Contribution to journal › Article › peer-review

3 Scopus citations

Abstract

We investigate the extent to which market participants use compensation payouts released in the DEF 14A proxy statement (DEF14A) to assess future firm performance by examining sell-side analysts' earnings forecasts. Consistent with prior work, we confirm that CEO compensation unexplained by current observable economic factors is positively associated with future firm performance. We find that both the likelihood that analysts revise their forecasts following release of the DEF14A and the magnitude and direction of analysts' forecast revisions are positively associated with unexplained CEO compensation. These associations are stronger after the SEC required additional compensation-related disclosures in late 2006 but lower if the firm has weak corporate governance or more precise other information. Analysts' reactions are not complete, however. Analysts' forecast errors measured months after the DEF14A release are associated with past unexplained compensation, especially in the pre-2006 period and for analysts who do not revise at the DEF14A release. Taken together, our results suggest that compensation payouts released in the DEF14A contain useful forward-looking information that is recognized by at least some sophisticated market participants and that the increased disclosure regulations assisted market participants in incorporating this information.

Original language	English (US)
Pages (from-to)	741-772
Number of pages	32
Journal	Contemporary Accounting Research
Volume	37
Issue number	2
DOIs	https://doi.org/10.1111/1911-3846.12559
State	Published - Jun 1 2020

Funding

* Accepted by Sarah McVay. We thank Mary Billings, Mark Bradshaw, Brian Bratten, John Core, Ellen Engel, Mike Kirschenheiter, David Koo, Tim Loughran, Michal Matejka, Sarah McVay, Sam Melessa, Tom Omer, Vivek Raval, Scott Richardson, Richard Willis, Rong Zhong, two anonymous reviewers, and workshop participants at Southern Meth-odist University, the University of Illinois at Chicago, and the University of Notre Dame for helpful comments. We are grateful to Bill McDonald for providing 10-K and DEF 14A proxy statement filing dates. The authors acknowledge the support of the EY Fellowship at the Mendoza College of Business, the University of Illinois at Chicago, and the Kellogg School of Management. † Corresponding author.

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

Access to Document

10.1111/1911-3846.12559

Cite this

@article{a50b5a5ccb2643e49f746fe7d5ce4056,

title = "Are Earnings Forecasts Informed by Proxy Statement Compensation Disclosures?",

abstract = "We investigate the extent to which market participants use compensation payouts released in the DEF 14A proxy statement (DEF14A) to assess future firm performance by examining sell-side analysts' earnings forecasts. Consistent with prior work, we confirm that CEO compensation unexplained by current observable economic factors is positively associated with future firm performance. We find that both the likelihood that analysts revise their forecasts following release of the DEF14A and the magnitude and direction of analysts' forecast revisions are positively associated with unexplained CEO compensation. These associations are stronger after the SEC required additional compensation-related disclosures in late 2006 but lower if the firm has weak corporate governance or more precise other information. Analysts' reactions are not complete, however. Analysts' forecast errors measured months after the DEF14A release are associated with past unexplained compensation, especially in the pre-2006 period and for analysts who do not revise at the DEF14A release. Taken together, our results suggest that compensation payouts released in the DEF14A contain useful forward-looking information that is recognized by at least some sophisticated market participants and that the increased disclosure regulations assisted market participants in incorporating this information.",

author = "Larocque, {Stephannie A.} and Martin, {Melissa A.} and Walther, {Beverly R.}",

note = "Funding Information: * Accepted by Sarah McVay. We thank Mary Billings, Mark Bradshaw, Brian Bratten, John Core, Ellen Engel, Mike Kirschenheiter, David Koo, Tim Loughran, Michal Matejka, Sarah McVay, Sam Melessa, Tom Omer, Vivek Raval, Scott Richardson, Richard Willis, Rong Zhong, two anonymous reviewers, and workshop participants at Southern Meth-odist University, the University of Illinois at Chicago, and the University of Notre Dame for helpful comments. We are grateful to Bill McDonald for providing 10-K and DEF 14A proxy statement filing dates. The authors acknowledge the support of the EY Fellowship at the Mendoza College of Business, the University of Illinois at Chicago, and the Kellogg School of Management. † Corresponding author. Publisher Copyright: {\textcopyright} CAAA",

year = "2020",

month = jun,

day = "1",

doi = "10.1111/1911-3846.12559",

language = "English (US)",

volume = "37",

pages = "741--772",

journal = "Contemporary Accounting Research",

issn = "0823-9150",