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Are Earnings Forecasts Informed by Proxy Statement Compensation Disclosures?†

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  • Stephannie A. Larocque
  • Melissa A. Martin
  • Beverly R. Walther

Abstract

We investigate the extent to which market participants use compensation payouts released in the DEF 14A proxy statement (DEF14A) to assess future firm performance by examining sell‐side analysts' earnings forecasts. Consistent with prior work, we confirm that CEO compensation unexplained by current observable economic factors is positively associated with future firm performance. We find that both the likelihood that analysts revise their forecasts following release of the DEF14A and the magnitude and direction of analysts' forecast revisions are positively associated with unexplained CEO compensation. These associations are stronger after the SEC required additional compensation‐related disclosures in late 2006 but lower if the firm has weak corporate governance or more precise other information. Analysts' reactions are not complete, however. Analysts' forecast errors measured months after the DEF14A release are associated with past unexplained compensation, especially in the pre‐2006 period and for analysts who do not revise at the DEF14A release. Taken together, our results suggest that compensation payouts released in the DEF14A contain useful forward‐looking information that is recognized by at least some sophisticated market participants and that the increased disclosure regulations assisted market participants in incorporating this information. La publication d'information relative à la rémunération dans la circulaire de sollicitation de procurations oriente‐t‐elle les prévisions de résultats? Les auteures se penchent sur la mesure dans laquelle les participants au marché utilisent les renseignements relatifs à la rémunération versée que contient la circulaire de sollicitation de procurations DEF 14A (la circulaire) pour évaluer la performance future de l'entreprise, en examinant les prévisions de résultats que formulent les analystes auprès des placeurs. Leur analyse, comme de précédents travaux, confirme que la rémunération du chef de la direction que n'expliquent pas les facteurs économiques couramment observables affiche un lien positif avec la performance future de l'entreprise. Les auteures constatent que la probabilité que les analystes révisent leurs prévisions à la suite de la publication de la circulaire de même que l'ampleur et l'orientation de cette révision sont en relation positive avec la rémunération inexpliquée du chef de la direction. Ce double lien est plus fort après la décision de la SEC, à la fin de 2006, d'exiger de l'information supplémentaire relativement à la rémunération, mais plus faible si la gouvernance de l'entreprise est déficiente ou si l'entreprise communique d'autres renseignements plus précis. Les réactions des analystes ne sont toutefois pas complètes. Les erreurs prévisionnelles des analystes évaluées des mois après la publication de la circulaire sont associées à une rémunération passée inexpliquée, en particulier au cours de la période antérieure à 2006 et dans le cas des analystes qui ne révisent pas leurs prévisions à la suite de la publication de la circulaire. Dans l'ensemble, les résultats obtenus par les auteures laissent croire que les renseignements relatifs à la rémunération versée que contient la circulaire livrent de l'information prospective dont l'utilité est reconnue par au moins certains participants au marché éclairés, et que les exigences accrues de la réglementation en matière d'information ont contribué à ce que les participants au marché assimilent cette information.

Suggested Citation

  • Stephannie A. Larocque & Melissa A. Martin & Beverly R. Walther, 2020. "Are Earnings Forecasts Informed by Proxy Statement Compensation Disclosures?†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 741-772, June.
    • Handle: RePEc:wly:coacre:v:37:y:2020:i:2:p:741-772
    DOI: 10.1111/1911-3846.12559
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