Executive Compensation and Analyst Guidance: The Link Between CEO Compensation and Expectations Management

60 Pages Posted: 4 Feb 2005

See all articles by Guido Bolliger

Guido Bolliger

Asteria Investment Managers

Manuel Kast

International Center FAME

Date Written: November 2003


During the last decade, a surprisingly high percentage of U.S. companies has fulfilled or beaten analysts' earnings per share forecasts. One of the most frequently cited reasons for this growing tendency is a change in the nature of U.S. executive compensation structure. As stock options have become an increasingly important part of executive compensation, the preservation or enhancement of short term stock value around the earnings announcement has become a priority for managers. Besides earnings management, a widespread way to meet analyst expectations is to inject pessimism into their forecasts by providing analysts with negative clues, or so-called downward guidance. This paper is the first to investigate the relationship between the practice of analyst guidance and executive compensation packages. We document a strong link between expectations management and the relevant options component of CEO compensation, bonus plans, and the percentage of the company's shares owned by the CEO who manages it. In a second set of tests, we show that firms which meet or beat analyst forecasts at the earnings announcement generate positive abnormal returns, which are significantly lower for firms suspected of managing expectations.

Keywords: Analyst guidance, Earnings surprise, Executive compensation, Stock options

Suggested Citation

Bolliger, Guido and Kast, Manuel, Executive Compensation and Analyst Guidance: The Link Between CEO Compensation and Expectations Management (November 2003). Available at SSRN: https://ssrn.com/abstract=555221 or http://dx.doi.org/10.2139/ssrn.555221

Guido Bolliger (Contact Author)

Asteria Investment Managers ( email )

Rue du Rhône 62
Geneva, 1204

Manuel Kast

International Center FAME ( email )

40, Boulevard du Pont-d'Arve
40, Bd du Pont-d'Arve
1211 Geneva 4, CH-6900

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