The Time Horizon of Managerial Incentives and Firms' Information Environment Quality

54 Pages Posted: 17 Mar 2010 Last revised: 16 Nov 2011

See all articles by J. Daniel Chi

J. Daniel Chi

University of Nevada, Las Vegas (UNLV) - Department of Finance

Manu Gupta

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate

Shane A. Johnson

Texas A&M University - Department of Finance

Date Written: July 6, 2011

Abstract

Managers whose equity-based incentives vest over a shorter time horizon appear to adopt strategies that reduce information environment quality and exacerbate information heterogeneity across investors. Firms with shorter-horizon managerial incentives are more likely to inflate reported earnings and deflate analysts’ earnings expectations. These firms also have greater analyst forecast dispersion, larger absolute forecast errors, and higher share turnover. Investors appear to at least partly understand incentive horizon issues because firms with shorter-horizon managerial incentives experience muted investor reaction to their earnings announcements and have statistically insignificant long-term abnormal stock returns. Overall, the results illustrate how the temporal structure of managerial incentives can influence managerial behavior and produce important capital market effects.

Keywords: managerial incentive, horizon, information quality, information environment

JEL Classification: G32, G34, G14

Suggested Citation

Chi, Jianxin Daniel and Gupta, Manu and Johnson, Shane A., The Time Horizon of Managerial Incentives and Firms' Information Environment Quality (July 6, 2011). Mays Business School Research Paper No. 2011-5, Available at SSRN: https://ssrn.com/abstract=1571704 or http://dx.doi.org/10.2139/ssrn.1571704

Jianxin Daniel Chi

University of Nevada, Las Vegas (UNLV) - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

HOME PAGE: http://www.unlv.edu/people/jianxin-chi

Manu Gupta

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284
United States

Shane A. Johnson (Contact Author)

Texas A&M University - Department of Finance ( email )

Mays School of Business
College Station, TX 77843-4218
United States
979-862-3318 (Phone)

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