Are CEOs incentivized to shelter good information?
Corresponding Author
Hongrui Feng
Finance Department, Sam and Irene Black School of Business, Penn State Behrend, Erie, Pennsylvania
Correspondence
Hongrui Feng, Sam and Irene Black School of Business, Penn State Behrend, 4701 College Erie, PA 16563.
Email: hxf51@psu.edu
Search for more papers by this authorYuecheng Jia
Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorCorresponding Author
Hongrui Feng
Finance Department, Sam and Irene Black School of Business, Penn State Behrend, Erie, Pennsylvania
Correspondence
Hongrui Feng, Sam and Irene Black School of Business, Penn State Behrend, 4701 College Erie, PA 16563.
Email: hxf51@psu.edu
Search for more papers by this authorYuecheng Jia
Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorAbstract
Prior theoretical studies on the agency problem hold different opinions from the empirical literature on two questions: (a) Are CEOs incentivized to shelter good information? (b) Are CEOs incentivized to evenly shelter good and bad information? This paper demonstrates that CEOs with high pay-performance incentives tend to successfully shelter good information rather than bad information. Furthermore, CEOs with high pay-performance incentives shelter good information by using real earnings management and textual manipulation but not accrual-based earnings management. These asymmetric information manipulation behaviors help to decrease corporate cash flow volatility as well as the jump and crash risk on the stock market.
Supporting Information
Filename | Description |
---|---|
fire12249-sup-0001-OnlineAppendix.pdf1.8 MB |
Table A.1: The description of main variables used in the study Table A.2: Correlation matrix Table A.3: The impact of the passage of Sarbanes–Oxley Act on the relation between Delta and R2 measures Table A.4: , , and Delta-driven real earnings management with industry fixed effect Table A.5: , , and Delta-driven information bundling with industry fixed effect Table A.6: Delta and standardized R2 measures following Hutton, Marcus, and Tehranian (2009) Table A.7: Discretional accrual and Delta |
Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
REFERENCES
- Adams, R. B., Almeida, H., & Ferreira, D. (2005). Powerful CEOs and their impact on corporate performance. Review of Financial Studies, 41, 401–439.
- Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3–37.
- Benmelech, E., Kandel, E., & Veronesi, P. (2010). Stock-based compensation and CEO (dis) incentives. The Quarterly Journal of Economics, 125(4), 1769–1820.
- Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(3), 511–529.
- Bris, A., Goetzmann, W. N., & Zhu, N. (2007). Efficiency and the bear: Short sales and markets around the world. The Journal of Finance, 62(3), 1029–1079.
- Brockman, P., Martin, X., & Unlu, E. (2010). Executive compensation and the maturity structure of corporate debt. The Journal of Finance, 65(3), 1123–1161.
- Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57–82.
- Chen, K. Y., Elder, R. J., & Hsieh, Y.-M. (2007). Corporate governance and earnings management: The implications of corporate governance best-practice principles for Taiwanese listed companies. Journal of Contemporary Accounting & Economics, 3(2), 73–105.
10.1016/S1815-5669(10)70024-2 Google Scholar
- Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual-based earnings management in the pre- and post-Sarbanes–Oxley periods. The Accounting Review, 83(3), 757–787.
- Cohn, J. B., Gurun, U. G., & Moussawi, R. (2014). Micro-level value creation under CEO short-termism. (Technical report). CiteSeer. Working Paper at University of Texas at Austin.
- Coles, J. L., Daniel, N. D., & Naveen, L. (2006). Managerial incentives and risk-taking. Journal of Financial Economics, 79(2), 431–468.
- Core, J., & Guay, W. (2002). Estimating the value of employee stock option portfolios and their sensitivities to price and volatility. Journal of Accounting Research, 40(3), 613–630.
- Dimson, E. (1979). Risk measurement when shares are subject to infrequent trading. Journal of Financial Economics, 7(2), 197–226.
- Engelberg, J. (2008). Costly information processing: Evidence from earnings announcements. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1107998.
- Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56.
- Fudenberg, D., & Tirole, J. (1995). A theory of income and dividend smoothing based on incumbency rents. Journal of Political Economy, 103(1), 75–93.
- Goex, R. F., & Wagenhofer, A. (2009). Optimal impairment rules. Journal of Accounting and Economics, 48(1), 2–16.
- Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2), 187–243.
- Graham, J. R., Harvey, C. R., & Rajgopal, S. (2004). The economic implications of corporate financial reporting. Social Science Electronic Publishing, 40(1–3), 3–73.
- Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Social Science Electronic Publishing, 40(1-3), 3–73.
- Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7(1), 85–107.
- Hong, H., Lim, T., & Stein, J. C. (2000). Bad news travels slowly: Size, analyst coverage, and the profitability of momentum strategies. Journal of Finance, 55(1), 265–295.
- Huang, A. G. (2009). The cross section of cashflow volatility and expected stock returns. Journal of Empirical Finance, 16(3), 409–429.
- Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, , and crash risk. Journal of Financial Economics, 94(1), 67–86.
- Jin, L., & Myers, S. C. (2006). R2 around the world: New theory and new tests. Journal of Financial Economics, 79(2), 257–292.
- Kim, J.-B., & Zhang, L. (2016). Accounting conservatism and stock price crash risk: Firm-level evidence. Contemporary Accounting Research, 33(1), 412–441.
- Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do managers withhold bad news? Journal of Accounting Research, 47(1), 241–276.
- Lafond, R., & Roychowdhury, S. (2008). Managerial ownership and accounting conservatism. Journal of Accounting Research, 46(1), 101–135.
- Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45(2), 221–247.
- Loughran, T., & McDonald, B. (2011). When is a liability not a liability? Textual analysis, dictionaries, and 10-ks. The Journal of Finance, 66(1), 35–65.
- Minton, B. A., & Schrand, C. (1999). The impact of cash flow volatility on discretionary investment and the costs of debt and equity financing. Journal of Financial Economics, 54(3), 423–460.
- Morck, R., Yeung, B., & Yu, W. (2000). The information content of stock markets: Why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58(1), 215–260.
- Palia, D. (2001). The endogeneity of managerial compensation in firm valuation: A solution. Review of Financial Studies, 14(3), 735–764.
- Peng, L., & Röell, A. (2008). Manipulation and equity-based compensation. American Economic Review, 98(2), 285–290.
- Peng, L., & Röell, A. (2014). Managerial incentives and stock price manipulation. The Journal of Finance, 69(2), 487–526.
- Radhakrishnan, G., Todd, M., Song, F., & Thakor, A. V. (2014). Duration of executive compensation. The Journal of Finance, 69(6), 2777–2817.
- Roll, R. (1988). The stochastic dependence of security price changes and transaction volumes: Implications for the mixture-of-distributions hypothesis. The Journal of Finance, 43(3), 541–566.
- Rountree, B., Weston, J. P., & Allayannis, G. (2008). Do investors value smooth performance? Journal of Financial Economics, 90(3), 237–251.
- Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting & Economics, 42(3), 335–370.
- Skinner, D. J. (1994). Why firms voluntarily disclose bad news? Journal of Accounting Research, 32(1), 38–60.
- Skinner, D. J. (1997). Earnings disclosures and stockholder lawsuits. Journal of Accounting and Economics, 23(3), 249–282.
- Skinner, D. J., & Sloan, R. G. (2002). Earnings surprises, growth expectations, and stock returns or don't let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7(2–3), 289–312.
10.1023/A:1020294523516 Google Scholar
- Tasker, S. C. (1998). Bridging the information gap: Quarterly conference calls as a medium for voluntary disclosure. Review of Accounting Studies, 3(1–2), 137–167.
10.1023/A:1009684502135 Google Scholar
- Tetlock, P. C. (2007). Giving content to investor sentiment: The role of media in the stock market. The Journal of Finance, 62(3), 1139–1168.
- Tirole, J. (2010). The theory of corporate finance. Princeton, NJ: Princeton University Press.
- Watts, R. L. (2003a). Conservatism in accounting part I: Explanations and implications. Accounting Horizons, 17(3), 207–221.
10.2308/acch.2003.17.3.207 Google Scholar
- Watts, R. L. (2003b). Conservatism in accounting part II: Evidence and research opportunities. Accounting Horizons, 17(4), 287–301.
10.2308/acch.2003.17.4.287 Google Scholar
- Yermack, D. (1995). Do corporations award CEO stock options effectively? Journal of Financial Economics, 39(2), 237–269.
- Yermack, D. (1997). Good timing: CEO stock option awards and company news announcements. The Journal of Finance, 52, 449–476.
- Yu, F. F. (2008). Analyst coverage and earnings management. Journal of Financial Economics, 88(2), 245–271.
- Zang, A. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675–703.