Hidden Gems: Do Compensation Disclosures Reveal Performance Expectations?

57 Pages Posted: 1 Aug 2018 Last revised: 13 Jun 2022

See all articles by C. Edward Fee

C. Edward Fee

Tulane University - A.B. Freeman School of Business

Zhi Li

Chapman University - The George L. Argyros School of Business & Economics

Qiyuan Peng

University of Dayton - School of Business Administration

Date Written: May 18, 2022

Abstract

We find that a new compensation disclosure item on expected payouts from performance-based stock grants reveals unique information regarding future firm performance. Using inferred performance expectations extracted from the disclosures, we find that firms disclosing the highest expected payout from performance-based stock grants significantly outperform in ROA, Q, sales growth, and profit margin over the next two years, while those disclosing the lowest expected payout underperform. The embedded forward-looking information is not captured by other known information channels, such as managerial earnings guidance, 10-K sentiment, insider selling activities, unexplained CEO pay, and analyst forecasts. Investors and analysts do not fully incorporate the information and are later surprised around earnings announcement days. A portfolio that buys firms with the highest performance expectation and shorts firms with the lowest expectation earns significantly positive abnormal returns. Our findings suggest that the enhanced compensation disclosure contains valuable information, but investors underreact to compensation information that is difficult to collect and process.

Keywords: Compensation disclosure, soft information, market efficiency

JEL Classification: G10; G14; G40; J33; M40; M41

Suggested Citation

Fee, C. Edward and Li, Zhi and Peng, Qiyuan, Hidden Gems: Do Compensation Disclosures Reveal Performance Expectations? (May 18, 2022). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3223711 or http://dx.doi.org/10.2139/ssrn.3223711

C. Edward Fee

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Zhi Li (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
714-6287224 (Phone)

Qiyuan Peng

University of Dayton - School of Business Administration ( email )

Dayton, OH 45469
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
176
Abstract Views
1,318
rank
246,692
PlumX Metrics