Disclosure and Monitoring: The Effects of Management Earnings Forecasts on the Pay-Performance Relation

Abstract

We examine whether improved disclosure leads to better monitoring of management. We posit that better disclosures improve shareholders' ability to relate managerial decisions to firm performance. We use management earnings forecasts as our empirical proxy for disclosure and document the following. First, we predict and find higher sensitivity of CEO compensation to performance (both accounting and stock returns). Second, in a sub-sample of firms that issue management earnings forecasts, we predict and find that the sensitivity of CEO compensation to performance is increasing in the number of forecasts that firms issue during the year and in the number of consecutive years that firms have issued management forecasts (i.e., the payperformance relation is increasing in the degree of disclosure). The results are robust to Heckman self-selection tests, matched-sample tests, and controls for the information environment, noise in our performance variables, the asymmetric sensitivity of cash compensation to returns, and variations in investment opportunities.

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“…Dessa forma, nota-se que o disclosure é um importante meio de monitoração dos gestores, de maneira a torná-los mais responsáveis por seus atos (HOPE;DE FRANCO;LAROCQUE, 2008). A idéia subjacente é que mais transparência faz com que os gestores direcionem suas atividades para o interesse dos investidores (BALL, 2006).…”