This paper examines whether managers with more convex equity incentives are more likely to provide voluntary disclosures of forward-looking information. We argue that providing these disclosures exposes managers to potential negative capital market consequences, and thus convex compensation contracts that limit these consequences should promote greater disclosure. We first provide evidence that there are long term negative consequences to firms that issue forecasts and report a negative earnings surprise. Next, using management earnings forecasts as a proxy for voluntary disclosure and the CEO’s portfolio vega to measure the convexity of equity incentives, we find a significantly positive association between voluntary disclosure and compensation convexity. Results from cross-sectional tests indicate that this association is stronger when managers are more likely to be concerned about negative investor response to forecasts (i.e., when operating results are more unpredictable and when investors are more likely to trade based on these disclosures). Overall, our study suggests that convex compensation contracts increase managers’ tendency to provide voluntary disclosures and help improve incentive alignment between managers and shareholders.
Dr Holly Yang is currently an Assistant Professor of Accounting at Singapore Management University. She completed her graduate studies at Cornell University in 2009 and taught at the Wharton School of the University of Pennsylvania prior to joining SMU. Her research focuses on the role of individual managers in corporate disclosure and determinants of firms’ voluntary disclosure decisions. She has published in the Journal of Accounting and Economics, The Accounting Review, Management Science, and Contemporary Accounting Research. She has taught courses on introductory accounting and intermediate accounting at the University of Michigan, Cornell University, and the Wharton School. She currently teaches Financial Accounting Theory at SMU.