Economic Consequences of Equity Compensation Disclosure

31 Pages Posted: 16 Jan 2011  

Jeremy Bertomeu

City University of New York (CUNY) - Stan Ross Department of Accountancy

Date Written: January 14, 2011

Abstract

The primary role of equity compensation is to provide incentives to an effort-averse agent. Here, we show that the chosen level of equity incentives, when publicly disclosed, will also convey information about future earnings, causing two-way linkages between incentive compensation and financial reporting. If either (a) market prices respond more (less) to information, (b) the manager is more (less) risk-averse, (c) earnings are more (less) noisy, then the firm's owners choose more pronounced (muted) incentives, in turn leading to greater (lower) future earnings. The model explains observed spurious correlations between firm performance and executive compensation, and provides several new predictions linking managerial, earnings and market determinants to optimal equity holdings.

Keywords: Compensation, Disclosure, Signalling, Managerial, Theory, Accounting, Options, CEO, Pay-for-performance, Market, Earnings, Information

JEL Classification: D2, D8, E2, G1, G3, J3, K2, L1, M1, M2, M4

Suggested Citation

Bertomeu, Jeremy, Economic Consequences of Equity Compensation Disclosure (January 14, 2011). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1740922

Jeremy Bertomeu (Contact Author)

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

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