The Role of Convex Equity Incentives in Managers’ Forecasting Decisions

Abstract

Prior literature suggests that voluntary disclosures of forward-looking information tend to lead to capital market benefits, but these disclosures may also result in negative capital market consequences if subsequent performance falls below expectations. We therefore hypothesize that convex equity incentives, which reward managers for stock price gains while limiting their exposure to losses, should promote greater voluntary forward-looking disclosure. Consistent with our hypothesis, we document a significantly positive association between equity incentive convexity and forecast issuance and frequency. This result is robust to a change specification, an instrumental variable approach, and CEO or CEO-firm fixed effects. Our study suggests that the risks arising from providing voluntary disclosures are important considerations in managers’ disclosure decisions.

Keywords: voluntary disclosure; earnings guidance; managerial incentives; disclosure risks

JEL Classification: M41