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Management Risk Incentives and the Readability of Corporate Disclosures

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  • Bidisha Chakrabarty
  • Ananth Seetharaman
  • Zane Swanson
  • Xu (Frank) Wang

Abstract

Managers with higher risk incentives (greater options vega) issue less readable disclosures. Firms in the top quartile of vega file annual reports that are about 15.4% more voluminous than those in the bottom quartile. The effect of vega on obfuscation remains after controlling for firm risk, operating complexities, accounting and auditor choices, chief executive officer changes, and an exogenous shock to option compensation. This effect is tempered by higher institutional ownership, lower management entrenchment, and greater analyst following. Obfuscation benefits managers by increasing return volatility (option value) and allowing greater earnings management. These findings document a new link between options and disclosure transparency.

Suggested Citation

  • Bidisha Chakrabarty & Ananth Seetharaman & Zane Swanson & Xu (Frank) Wang, 2018. "Management Risk Incentives and the Readability of Corporate Disclosures," Financial Management, Financial Management Association International, vol. 47(3), pages 583-616, September.
    • Handle: RePEc:bla:finmgt:v:47:y:2018:i:3:p:583-616
    DOI: 10.1111/fima.12202
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