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Executive Compensation and Analyst Guidance: The Link between CEO Pay and Expectations Management

Author

Listed:
  • Guido BOLLIGER

    (HEC-University of Neuchâtel and FAME)

  • Manuel KAST

    (HEC-University of Lausanne and FAME)

Abstract

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 plan payments, and the value of the firm's shares owned by its managing CEO. In a second set of tests, we show that firms that meet or beat analyst forecasts at the earnings announcement generate positive abnormal returns, which are significantly lower for firms suspected of managing expectations.

Suggested Citation

  • Guido BOLLIGER & Manuel KAST, 2003. "Executive Compensation and Analyst Guidance: The Link between CEO Pay and Expectations Management," FAME Research Paper Series rp102, International Center for Financial Asset Management and Engineering.
    • Handle: RePEc:fam:rpseri:rp102
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    More about this item

    Keywords

    Analyst guidance; Earnings surprise; Executive compensation; Stock options;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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