Are CEOs and CFOs Rewarded for Disclosure Quality?

Abstract

This study provides evidence regarding the importance boards of directors place on effective communication with the investor community by examining whether CEO and CFO compensation are related to the quality of the firm’s financial disclosures. Using an index derived from analyst forecast characteristics and management forecast accuracy as measurers of disclosure quality, we find changes in the annual bonus for both the CEO and CFO to be positively associated with changes in disclosure quality. We also find that the relation is stronger for high growth firms, firms that have stronger governance structures, and for executives with lower equity incentives. Overall, our findings provide insight into the importance boards place on effective communication with investors as a responsibility of the CEO and CFO and therefore provide them with contractual incentives to address the moral hazard problem associated with voluntary disclosures.

Keywords: executive compensation; voluntary disclosure; corporate governance

JEL Classification: M41