Self-serving behavior in managers' discretionary information disclosure decisions

Lewellen, Wilbur G.; Park, Taewoo; Ro, Byung T.

doi:10.1016/0165-4101(95)00417-3

“…In contrast to studies using peer group performance graphs in US proxy statements (Lewellen et al, 1996;Porac et al, 1999), we find no evidence that firms use self-selected comparator groups (rather than pre-defined indices) to provide easier performance targets. Ex ante selection biases (based on prior firm returns relative to the chosen comparator group)…”

Section: Introductioncontrasting

confidence: 52%

“…Various academic researchers and business writers contend that the ability of firms to choose their own comparator groups or to set low relative performance hurdles allow executives to minimize RPE's impact on compensation by making the performance conditions easy to achieve (e.g., Dye, 1984;Morgenson, 2006;Lewellen et al, 1996;Porac et al , 1999). Studies using the required peer group performance graphs in US proxy statements support the contention that firms opportunistically select peer groups to enhance their relative performance.…”

Section: Opportunistic Rpe Usementioning

confidence: 97%

Explicit Relative Performance Evaluation in Performance-Vested Equity Grants

Carter

¹

,

Ittner

²

,

Zechman

³

2008

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Using data from FTSE 350 firms, we examine factors influencing explicit relative performance evaluation (RPE) conditions in performance-vested equity grants. We provide exploratory evidence on whether the use or characteristics of RPE are associated with efforts to improve incentives by removing common risk, other economic factors discussed in the RPE literature, or external pressure to implement RPE. We find that many of these economic factors, including common risk reduction, are more closely related to specific relative performance conditions than to the firm-level decision to use RPE in some or all of their equity grants. We also find that greater external monitoring by institutional investors or others is associated with plans with tougher overall RPE conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. Further, we find evidence that vesting percentages vary in RPE and non-RPE plans.Keywords restricted stock grant, equity plan, dividend playout ratio, stock option grant, compensation risk, RPE, equitybased pay, dividend yield, executive compensation contract, equity incentive, institutional investor, stock return volatility, London stock exchange, stock market performance, share price performance Abstract ______________________________________________________________________________ Using data from FTSE 350 firms, we examine the factors influencing the explicit use of relative performance evaluation (RPE) in performance-vested equity grants, and whether RPE is used to improve incentives or to opportunistically increase vesting and/or placate external parties calling for its use. We find little evidence that the simple decision to use or not use RPE is associated with the economic factors identified in RPE theories. Instead, these factors are associated with specific RPE performance conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. However, we find no evidence that vesting percentages are higher in RPE plans than in non-RPE plans, and no evidence that RPE is used opportunistically to increase vesting and compensation.

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“…Studies using the required peer group performance graphs in US proxy statements support the contention that firms opportunistically select peer groups to enhance their relative performance. Lewellen et al (1996), for example, find that companies exploit reporting discretion allowed by the SEC to choose peer groups that underperform the industry or broad market indices for the firm. The authors interpret these results as reflecting a downward bias in the firms' choice of performance benchmarks.…”

Section: Opportunistic Rpe Usementioning

confidence: 99%

“…Second, the detailed data on the specific comparator groups used for RPE and the subsequent achievement of equity plan performance conditions provide the opportunity for more direct tests of claims that firms selectively choose peer groups to enhance their relative standing and increase compensation (e.g., Morgenson, 2006;Lewellen, Park, and Ro, 1996). Third, performance-vested equity grants are already widely used by firms outside the United States and are being adopted by a growing number of US firms (Towers Perrin, 2005).…”

Section: Introductionmentioning

confidence: 99%

Explicit relative performance evaluation in performance-vested equity grants

Carter

¹

,

Ittner

²

,

Zechman

³

2009

View full text Add to dashboard Cite

Using data from FTSE 350 firms, we examine factors influencing explicit relative performance evaluation (RPE) conditions in performance-vested equity grants. We provide exploratory evidence on whether the use or characteristics of RPE are associated with efforts to improve incentives by removing common risk, other economic factors discussed in the RPE literature, or external pressure to implement RPE. We find that many of these economic factors, including common risk reduction, are more closely related to specific relative performance conditions than to the firm-level decision to use RPE in some or all of their equity grants. We also find that greater external monitoring by institutional investors or others is associated with plans with tougher overall RPE conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. Further, we find evidence that vesting percentages vary in RPE and non-RPE plans.Keywords restricted stock grant, equity plan, dividend playout ratio, stock option grant, compensation risk, RPE, equitybased pay, dividend yield, executive compensation contract, equity incentive, institutional investor, stock return volatility, London stock exchange, stock market performance, share price performance Abstract ______________________________________________________________________________ Using data from FTSE 350 firms, we examine the factors influencing the explicit use of relative performance evaluation (RPE) in performance-vested equity grants, and whether RPE is used to improve incentives or to opportunistically increase vesting and/or placate external parties calling for its use. We find little evidence that the simple decision to use or not use RPE is associated with the economic factors identified in RPE theories. Instead, these factors are associated with specific RPE performance conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. However, we find no evidence that vesting percentages are higher in RPE plans than in non-RPE plans, and no evidence that RPE is used opportunistically to increase vesting and compensation.

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“…Lewellen et al (1996), Schrand and Walther (2000), Cassar (2001) and Short and Palmer (2003) investigate the selective use of a benchmark to highlight positive changes in earnings. Performance comparisons have been studied in the context of performance referents, benchmark earnings number, and benchmark comparisons in proxy statements and share performance graphs.…”

Section: Impression Management Using Performance Comparisonsmentioning

confidence: 99%

Impression Management: Developing and Illustrating a Scheme of Analysis for Narrative Disclosures - A Methodological Note

Brennan

¹

,

Saorín

²

,

Pierce

³

2008

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Publication informationAccounting, Auditing and Accountability Journal, 22 (5) disclosures. An impression management bias score is devised to capture the extent to which impression management introduces bias into corporate narratives. An example of the application of the composite impression management score and impression management bias score methodology is provided.Findings -While not amounting to systematic evidence, the 21 illustrative examples suggest that impression management is pervasive in corporate financial communications using multiple impression management methods, such that positive information is exaggerated, while negative information is either ignored or is underplayed.Originality/value -Four impression management methods are described in detail, illustrated by 21 examples. These four methods are examined together. New impression management methods are studied in this paper for the first time. This paper extends prior impression management measures in two ways. First, a composite impression management score based on four impression management techniques is articulated. Second, the composite impression management score methodology is extended to capture a measure for bias, in the form of an impression management bias score. This is the first time outside the US that narrative disclosures in press releases have been studied.

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Self-serving behavior in managers' discretionary information disclosure decisions

Cited by 95 publications

References 28 publications

Explicit Relative Performance Evaluation in Performance-Vested Equity Grants

Explicit Relative Performance Evaluation in Performance-Vested Equity Grants

Explicit relative performance evaluation in performance-vested equity grants

Impression Management: Developing and Illustrating a Scheme of Analysis for Narrative Disclosures - A Methodological Note

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