CEO Incentives and Earnings Prediction

49 Pages Posted: 21 Aug 2012

See all articles by James Jianxin Gong

James Jianxin Gong

California State University at Fullerton

Siyi Li

California State University, Fullerton - Department of Accounting

Date Written: April 23, 2012

Abstract

This study investigates whether information about Chief Executive Officer (CEO) incentives is useful for predicting future earnings. We find that in companies with higher CEO equity incentives, current year earnings are more informative of future earnings than in other companies. Additionally, in an earnings prediction setting, CEO incentives are shown to provide information about future earnings that is incremental to current earnings or earnings components. The predictive power of CEO incentives for future earnings is robust to the inclusion of other predictors of future earnings. Furthermore, we find that CEO incentives are predictive of “real” future earnings, as represented by operating cash flow and non-discretionary accruals, but not predictive of future discretionary accruals. Finally, we find that financial analysts do not incorporate information about CEO incentives when they forecast future earnings. This result suggests that incorporating CEO incentives can potentially improve analyst forecasts of future earnings.

Keywords: Executive compensation, Equity incentives, Incentive structure, Earnings prediction, Earnings informativeness, Analyst forecast, Agency theory

JEL Classification: J33, J41, M41, M51

Suggested Citation

Gong, Jianxin and Li, Siyi, CEO Incentives and Earnings Prediction (April 23, 2012). Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2045021

Jianxin Gong (Contact Author)

California State University at Fullerton ( email )

Department of Accounting
Mihaylo College of Business and Economics
Fullerton, CA 92831
United States
(657)278-3897 (Phone)
(657)278-4518 (Fax)

Siyi Li

California State University, Fullerton - Department of Accounting ( email )

P.O. Box 34080
Fullerton, CA 92834-6848
United States

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