The Numbers Game: How do Managers Compensated with Stock Options meet Analysts’ Earnings Forecasts?

Overlapping Membership on Audit and Compensation Committees and Financial Reporting Quality

“…Cheng and Warfield () show that firms with high equity incentives are more likely to meet or just beat analysts’ forecasts. Bauman et al () find that firms compensating top managers more heavily with stock options employ income‐increasing abnormal accruals to enable them to more frequently meet analysts’ earnings targets. Matsunaga and Park () find CEO bonus payments give CEOs an economic incentive to beat the analyst forecast benchmark and the earnings changes benchmark.…”

“…Given the significant potential benefits associated with meeting or beating earnings benchmarks, managers are not passive in the earnings game. Rather, they try to win the game by altering reported earnings and/or influencing analysts’ expectations (Bauman et al ). Research on ‘benchmark‐beating’ has found some evidence of deteriorating financial reporting quality for firms just beating some earnings benchmarks (Cheng and Warfield ; Bauman et al ).…”

“…Rather, they try to win the game by altering reported earnings and/or influencing analysts’ expectations (Bauman et al ). Research on ‘benchmark‐beating’ has found some evidence of deteriorating financial reporting quality for firms just beating some earnings benchmarks (Cheng and Warfield ; Bauman et al ). If overlapping committees are beneficial from a governance perspective, then the ‘benchmark beating’ context should provide a powerful test, since CEOs have strong incentives for beating or meeting earnings thresholds through manipulative financial reporting to maximise short‐run compensation at the expense of long‐term shareholder value.…”

Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment

“…However, Quinn (2018) finds that after the adoption of stock ownership plans that require CEOs to increase stock ownership, firms exhibit a decreased propensity to meet or just beat analysts' forecasts. Bauman et al (2005) find a positive association between optionbased compensation and the likelihood that a firm uses analyst guidance to meet or beat forecasts. However, they find no association between option-based compensation and firms beating analyst forecasts by using abnormal accruals.…”

“…I focus on meeting or just beating analysts' consensus forecasts as a measure of opportunistic management behavior. Several studies suggest that beating analysts' forecasts is an important manifestation of earnings management (e.g., Degeorge et al 1999;Burgstahler and Eames 2003), and many studies have shown that managers exhibit abnormal behavior around earnings targets (e.g., Burgstahler and Dichev 1997;Dhaliwal et al 2004;Bauman et al 2005;McVay et al 2006;Jacob and Jorgensen 2007). According to Graham et al (2005), most managers believe that earnings, not cash flows or revenues, are the key metric used by outsiders.…”