Uncertainty in Managers’ Reporting Objectives and Investors’ Response to Earnings Reports: Evidence from the 2006 Executive Compensation Disclosures

59 Pages Posted: 19 Jan 2017 Last revised: 4 Oct 2018

See all articles by Fabrizio Ferri

Fabrizio Ferri

University of Miami - Miami Business School

Ronghuo Zheng

University of Texas at Austin - McCombs School of Business

Yuan Zou

Harvard University - Business School (HBS)

Date Written: June 12, 2018

Abstract

We examine whether the information content of the earnings report, as captured by the earnings response coefficient (ERC), increases when investors’ uncertainty about the manager’s reporting objectives decreases, as predicted in Fischer and Verrecchia (2000). We use the 2006 mandatory compensation disclosures as an instrument to capture a decrease in investors’ uncertainty about managers’ incentives and reporting objectives. Employing a difference-in-differences design and exploiting the staggered adoption of the new rules, we find a statistically and economically significant increase in ERC for treated firms relative to control firms, largely driven by profit firms. Cross-sectional tests suggest that the effect is more pronounced in subsets of firms most affected by the new rules. Our findings represent the first empirical evidence of a role of compensation disclosures in enhancing the information content of financial reports.

Keywords: Earnings response coefficient (ERC), compensation disclosures, SEC rules

JEL Classification: G38, G30, G34, M41, M48

Suggested Citation

Ferri, Fabrizio and Zheng, Ronghuo and Zou, Yuan, Uncertainty in Managers’ Reporting Objectives and Investors’ Response to Earnings Reports: Evidence from the 2006 Executive Compensation Disclosures (June 12, 2018). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2902246 or http://dx.doi.org/10.2139/ssrn.2902246

Fabrizio Ferri (Contact Author)

University of Miami - Miami Business School ( email )

Coral Gables, FL 33146-6531
United States

Ronghuo Zheng

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Yuan Zou

Harvard University - Business School (HBS)

Soldiers Field Road
Morgan 362
Boston, MA 02163
United States

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