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Seemingly Opportunistic Management Earnings Guidance Before Stock Option Grants: Does It Misrepresent Firms’ Underlying Performance?

Asia-Pacific Journal of Accounting & Economics

Posted: 26 Apr 2006 Last revised: 9 Apr 2013

Lynn L. Rees

Texas A&M University - Department of Accounting

Anup Srivastava

Tuck School of Business at Dartmouth

Senyo Y. Tse

Texas A&M University - Lowry Mays College & Graduate School of Business

Date Written: April 4, 2013

Abstract

The exercise price of stock options is typically the closing stock price on the option grant dates, so managers can potentially benefit from low stock prices on those dates. Prior studies find that on average, managers issue more pessimistic guidance before than after grant dates. They interpret this asymmetric pattern as representing managers’ opportunistic behavior. Nevertheless, it is not clear whether this pattern reflects managers’ selective timing of bad news disclosures or a deliberate misrepresentation of underlying firm performance. This paper extends the literature by examining the effects of managerial stock option incentives on the accuracy and the information content of firms’ voluntary earnings guidance. We find that pre-grant guidance significantly improves existing consensus earnings forecasts, and is similar in bias and accuracy to post-grant guidance. Moreover, investors and analysts react similarly to pre-grant vs. post-grant guidance, suggesting that the main consumers of earnings guidance view these two types of guidance to be equally informative. Our results are consistent with the notion that managers may opportunistically select the type or the timing of disclosures, but when they opt to disclose, they do not misrepresent the underlying firm performance. On the contrary, the seemingly opportunistic guidance before option grants improves overall firms’ information environment, because it is at least as truthful and informative as post-grant guidance, and is issued more frequently than by managers who do not have incentives to report bad news before earnings announcements.

Keywords: stock options, earnings guidance, information content, incentives

JEL Classification: G29, M14, M41, M43, M45, M52, K22, J33, G34

Suggested Citation

Rees, Lynn L. and Srivastava, Anup and Tse, Senyo Y., Seemingly Opportunistic Management Earnings Guidance Before Stock Option Grants: Does It Misrepresent Firms’ Underlying Performance? (April 4, 2013). Asia-Pacific Journal of Accounting & Economics. Available at SSRN: https://ssrn.com/abstract=898303 or http://dx.doi.org/10.2139/ssrn.898303

Lynn L. Rees

Texas A&M University - Department of Accounting ( email )

Mays Business School
College Station, TX 77843-4353
United States
979-845-6078 (Phone)
979-845-0028 (Fax)

Anup Srivastava

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

Senyo Y. Tse (Contact Author)

Texas A&M University - Lowry Mays College & Graduate School of Business ( email )

Wehner 401Q, MS 4353
456C
College Station, TX 77843-4218
United States
979-845-3784 (Phone)

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