Abstract

http://ssrn.com/abstract=898303
 
 

References (35)



 


 



Seemingly Opportunistic Management Earnings Guidance Before Stock Option Grants: Does It Misrepresent Firms’ Underlying Performance?


Lynn L. Rees


Texas A&M University - Department of Accounting

Anup Srivastava


Northwestern University - Kellogg School of Management

Senyo Y. Tse


Texas A&M University - Lowry Mays College & Graduate School of Business

April 4, 2013

Asia-Pacific Journal of Accounting & Economics

Abstract:     
The exercise price of stock options is typically the closing stock price on the option grant dates, so managers can potentially benefit from low stock prices on those dates. Prior studies find that on average, managers issue more pessimistic guidance before than after grant dates. They interpret this asymmetric pattern as representing managers’ opportunistic behavior. Nevertheless, it is not clear whether this pattern reflects managers’ selective timing of bad news disclosures or a deliberate misrepresentation of underlying firm performance. This paper extends the literature by examining the effects of managerial stock option incentives on the accuracy and the information content of firms’ voluntary earnings guidance. We find that pre-grant guidance significantly improves existing consensus earnings forecasts, and is similar in bias and accuracy to post-grant guidance. Moreover, investors and analysts react similarly to pre-grant vs. post-grant guidance, suggesting that the main consumers of earnings guidance view these two types of guidance to be equally informative. Our results are consistent with the notion that managers may opportunistically select the type or the timing of disclosures, but when they opt to disclose, they do not misrepresent the underlying firm performance. On the contrary, the seemingly opportunistic guidance before option grants improves overall firms’ information environment, because it is at least as truthful and informative as post-grant guidance, and is issued more frequently than by managers who do not have incentives to report bad news before earnings announcements.

Keywords: stock options, earnings guidance, information content, incentives

JEL Classification: G29, M14, M41, M43, M45, M52, K22, J33, G34

Accepted Paper Series


Not Available For Download

Date posted: April 26, 2006 ; Last revised: April 9, 2013

Suggested Citation

Rees, Lynn L. and Srivastava, Anup and Tse, Senyo Y., Seemingly Opportunistic Management Earnings Guidance Before Stock Option Grants: Does It Misrepresent Firms’ Underlying Performance? (April 4, 2013). Asia-Pacific Journal of Accounting & Economics. Available at SSRN: http://ssrn.com/abstract=898303 or http://dx.doi.org/10.2139/ssrn.898303

Contact Information

Lynn L. Rees
Texas A&M University (TAMU) - Department of Accounting ( email )
Mays Business School
College Station, TX 77843-4353
United States
979-845-6078 (Phone)
979-845-0028 (Fax)

Anup Srivastava
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
Senyo Y. Tse (Contact Author)
Texas A&M University - Lowry Mays College & Graduate School of Business ( email )
Wehner 401Q, MS 4353
456C
College Station, TX 77843-4218
United States
979-845-3784 (Phone)
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