Analyst Forecasts and Target Setting in Executive Annual Bonus Contracts*

2020 ◽  
pp. 0000-0000
Author(s):  
Sunhwa Choi ◽  
Sunyoung Kim ◽  
Sewon Kwon ◽  
Jae Yong Shin
Keyword(s):  
Earnings Forecasts ◽  
Positive Association ◽  
Analyst Forecasts ◽  
Past Performance ◽  
Target Setting ◽  
Executive Performance ◽  
Performance Targets ◽  
Sensitivity Tests ◽  
Annual Earnings ◽  
Forward Looking

Whereas practitioners often recommend that firms incorporate forward-looking information in setting executive performance targets, academic studies have mainly focused on past information (e.g., past performance) as information sources. Using analysts' annual earnings forecasts as the main proxy for market-based forward-looking information, we find evidence that boards of S&P 1500 firms exploit forward-looking information in setting targets for executive annual bonus contracts. Furthermore, we find that the positive association between analyst forecasts and firms' bonus target revisions is more pronounced when forecasts are more informative about future firm performance and when they are less likely to be influenced by managers. Our results are robust to a battery of sensitivity tests.

Ratcheting and the Role of Relative Target Setting

2014 ◽  
Vol 89 (4) ◽  
pp. 1197-1226 ◽  
Author(s):  
Carmen Aranda ◽  
Javier Arellano ◽  
Antonio Davila
Keyword(s):  
Data Availability ◽  
Past Performance ◽  
Target Setting ◽  
Performance Targets ◽  
Setting Process ◽  
Other Information ◽  
Absolute Magnitudes ◽  
Using Data ◽  
Individual Information

ABSTRACT: Managers use a variety of information to set performance targets. Using data from 376 branches of a large travel retailer over five years, this study documents supervisors considering the relative performance of comparable units in target setting, which we term relative target setting (RTS). We find evidence of RTS after controlling for individual past performance in the form of ratcheting. Our findings also indicate that RTS partially shapes the use of other information on past performance. Specifically, we find that the magnitude of ratcheting decreases (increases) with RTS for favorable (unfavorable) performance variances, and the asymmetry of ratcheting characterized by different ratcheting coefficients for unfavorable than for favorable variances is significant for large absolute magnitudes of RTS. Managers use the flexibility associated with the subjectivity of the target-setting process to weight peer and individual information differently across different units. Data Availability: The data used in this study cannot be made publicly available due to confidentiality agreements with the participating organization.

Annual Earnings Guidance and the Smoothing of Analysts’ Multi-Period Forecasts

2020 ◽  
pp. 0148558X2094557
Author(s):  
Jianchuan Luo ◽  
Joshua Ronen ◽  
Ron Shalev ◽  
Michael (Minye) Tang
Keyword(s):  
Capital Market ◽  
Earnings Forecasts ◽  
Analyst Forecasts ◽  
Earnings Guidance ◽  
Long Term Effects ◽  
Earnings Expectations ◽  
Analyst Earnings ◽  
Annual Earnings ◽  
Market Benefits

This article examines the use of annual earnings guidance as a mechanism used by managers to reduce the volatility of analyst earnings forecasts and allow them to report smooth earnings without missing quarterly analyst forecasts. Facing the pressure to meet or beat analyst forecasts and driven by the perceived capital market benefits of reporting a smooth earnings path, managers attempting to influence investors’ earnings expectations over a longer horizon can issue annual guidance to smooth the time-series path of analyst forecasts, a strategy we term as “expectation smoothing.” Our empirical results suggest that annual guidance reduces the volatility of analysts’ multi-period forecasts, which in turn contributes to a smoother actual earnings and higher likelihood of meeting analysts’ quarterly forecasts. We also find that issuing quarterly guidance does not affect the smoothness of analysts’ earnings expectations and that managers with longer horizons are more likely to issue annual guidance, consistent with the unique long-term effects of annual earnings guidance.

Changes in Internal Control Disclosure and Analyst Forecasts Around Mandatory Disclosure Required by the China SOX

2019 ◽  
Vol 33 (3) ◽  
pp. 43-68 ◽  
Author(s):  
Xudong Ji ◽  
Wei Lu ◽  
Wen Qu ◽  
Vernon J. Richardson
Keyword(s):  
Internal Control ◽  
Forecast Error ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Analyst Forecasts ◽  
Analyst Forecast ◽  
Listed Firms ◽  
Analyst Earnings ◽  
Basic Standard ◽  
Jel Classifications

SYNOPSIS Beginning January 1, 2012, all publicly listed firms in China are required, under the Basic Standard of Enterprise Internal Control (China SOX), to provide an internal control report (ICR). Prior to that, many firms had elected to voluntarily comply with this regulation. We examine the change in internal control disclosure regimes and its impact on the properties of analyst earnings forecasts. We compare the quantity and severity of ICWs disclosed under voluntary versus mandatory regimes, and find evidence suggesting that the disclosure of more serious ICWs increases when ICW disclosures become mandatory. We then investigate the effect of ICW disclosures on analyst forecast error and dispersion. We find that measures of ICWs are negatively associated with desirable properties of analyst earnings forecasts. We also find a less positive association between ICW disclosures and forecast error and dispersion in the mandatory regime. JEL Classifications: G34; G38; M41.

Performance Target Revisions in Incentive Contracts: Do Information and Trust Reduce Ratcheting and the Ratchet Effect?

2015 ◽  
Vol 90 (5) ◽  
pp. 1755-1778 ◽  
Author(s):  
Jasmijn C. Bol ◽  
Jeremy B. Lill
Keyword(s):  
Structural Changes ◽  
Data Availability ◽  
Performance Information ◽  
Ratchet Effect ◽  
Past Performance ◽  
Performance Targets ◽  
Positive Performance ◽  
Confidentiality Agreement ◽  
To Receive ◽  
Performance Target

ABSTRACT In this study, we examine a setting where principals use past performance to annually revise performance targets, but do not fully incorporate the past performance information in their target revisions. We argue that this situation is driven by some principals and agents having an implicit agreement where the principal “allows” the agent to receive economic rents from positive performance-target deviations that are the result of superior effort or transitory gains by not revising targets upward, while the agent “accepts” target revisions by not restricting output when these revisions are the result of structural changes in the operation's true economic capacity. Although both the principal and the agent can benefit from an implicit agreement, we argue that for the implicit agreement to be maintainable, the principal either needs information on the cause of the performance-target deviation or there needs to be trust between the principal and the agent. Using archival data across multiple years and independent bank units, we find a pattern of ratchet attenuation and output restriction that is consistent with the existence of implicit agreements for those principal-agent dyads where information asymmetry is sufficiently reduced or mutual trust exists. Data Availability: Data used in this study cannot be made public due to a confidentiality agreement with the participating firm.

Asymmetric Effects of Regulation FD on Management Earnings Forecasts

2015 ◽  
Vol 91 (1) ◽  
pp. 119-152 ◽  
Author(s):  
Frank Heflin ◽  
William J. Kross ◽  
Inho Suk
Keyword(s):  
Public Management ◽  
Earnings Forecasts ◽  
Analyst Forecasts ◽  
Data Availability ◽  
Management Earnings Forecasts ◽  
Fair Disclosure ◽  
Environment Variables ◽  
Regulation Fd ◽  
Investor Trading ◽  
Induced Changes

ABSTRACT We document that the effect of Regulation Fair Disclosure (FD) on public management earnings forecasts (MFs) is asymmetric. Our results suggest that FD increased managers' use of MFs as a downward-guidance mechanism to help achieve meeting or beating earnings expectations. This effect is more pronounced when existing analyst forecasts are optimistic and when firms had selective disclosure policies pre-FD. We also find that the increased use of MFs as downward guidance leads to post-FD reductions in MF quality (accuracy and informativeness) for the downward guiding MFs that are most likely meet/beat motivated, while quality improves for upward-guiding MFs. Finally, our evidence suggests that results from prior research about FD-induced changes in information environment variables, such as analyst forecast quality and investor trading activities, depend on whether the firm issues MFs and whether those MFs are downward guiding. Data Availability: All data are available from public databases identified in the paper.

Enhancing Firm Competitiveness through Concurrent Implementation of TQM, JIT and TPM

2014 ◽  
Vol 660 ◽  
pp. 976-982
Author(s):  
Lukman Sukarma
Keyword(s):  
Empirical Evidence ◽  
Research Methodology ◽  
Company Performance ◽  
Insufficient Evidence ◽  
Target Setting ◽  
Performance Targets ◽  
World Class ◽  
The Impact ◽  
Simultaneous Implementation ◽  
World Class Manufacturing

As a continuation of the previous paper by the author for this conference, this article provides empirical evidence for the impact of concurrent implementation of TQM, JIT and TPM in enhancing company performance, and hence its competitiveness. In doing this, ingredients of World Class Manufacturing company performance are reviewed, hypotheses and research methodology are developed, and data are analysed to verify the hypotheses. It is confirmed that plants implementing TQM, JIT and TPM concurrently outperform those, which implement only one or two of the methods, and there is no difference in performance among plants using either one or two of the methods. Further investigation on the causes of difference in performance reveals that, in addition to simultaneous implementation of the three methods, the establishment of performance targets leads to better performance. However, there is insufficient evidence to claim that involving employees in target setting has an effect on performance.

Stock Splits: Tests of the Earnings Signaling and Attention Directing Hypotheses Using Analyst Forecasts and Revisions

1994 ◽  
Vol 9 (3) ◽  
pp. 411-422 ◽  
Author(s):  
David T. Doran
Keyword(s):  
Earnings Forecasts ◽  
Analyst Forecasts ◽  
Analyst Forecast ◽  
Specific Level ◽  
Future Earnings ◽  
Earnings Information ◽  
Stock Split ◽  
Forecast Revision ◽  
Earnings Performance ◽  
Signaling Hypothesis

The major findings of this study are: (1) earnings performance of splitting firms is favorable relative to preevent longterm analyst (Value Line) forecasts; (2) analysts significantly revise earnings forecasts upward in response to stock split announcements; and (3) in the case of stock split announcing firms, there is a high correlation between future earnings performance and analyst forecast revision. These findings indicate that stock split announcements convey “permanent” earnings information to the market, and security analysts scrutinize the earnings signal at the firm specific level. The results support both the earnings signaling hypothesis and the attention directing hypothesis concerning stock split events.

Dispersion in Analysts' Earnings Forecasts as a Measure of Uncertainty

1998 ◽  
Vol 13 (3) ◽  
pp. 245-270 ◽  
Author(s):  
Orie E. Barron ◽  
Pamela S. Stuerke
Keyword(s):  
Stock Returns ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Cash Flows ◽  
Financial Reports ◽  
Forecast Dispersion ◽  
Additional Information ◽  
Price Reactions ◽  
Daily Stock Returns ◽  
Future Cash Flows

This study examines whether dispersion in analysts' earnings forecasts reflects uncertainty about firms' future economic performance. Prior research examining this issue has been inconclusive. These studies have concluded that forecast dispersion is likely to reflect factors other than uncertainty about future cash flows, such as uncertainty about the price irrelevant component of firms' financial reports (Daley et al. [1988]; Imhoff and Lobo [1992]). Abarbanell et al. (1995) argue that, if forecast dispersion after (i.e., conditional on) an earnings announcement reflects uncertainty about firms' future cash flows and this uncertainty causes investors to desire additional information, then dispersion will be positively associated with both (a) the level of demand for more information and (b) the magnitude of price reactions around the subsequent earnings release. In this study, we construct a measure of informational demand using the incidence of analyst forecast updating after dispersion is measured. We find a positive association between dispersion in earnings forecasts after an earnings release and this measure of informational demand. We also find a positive association between forecast dispersion and the magnitude of price reactions around subsequent earnings releases. These associations are most apparent when potentially stale (or outdated) forecasts are removed from measures of forecast dispersion. These associations also persist after controlling for other measures of uncertainty (e.g., beta and the variance of daily stock returns), consistent with dispersion in analysts' earnings forecasts serving as a useful indicator of uncertainty about the price relevant component of firms' future earnings.

Misuse of non-mandatory earnings reporting by companies

2019 ◽  
Vol 27 (1) ◽  
pp. 125-146 ◽  
Author(s):  
Michael Howard ◽  
Warren Maroun ◽  
Robert Garnett
Keyword(s):  
Management Strategy ◽  
Stock Exchange ◽  
Earnings Forecasts ◽  
Analyst Forecasts ◽  
Small Sample ◽  
Management Tool ◽  
Response Analysis ◽  
Content Type ◽  
The Usa ◽  
Expectation Management

Purpose The purpose of this paper is to examine the possibility of South African companies listed on the Johannesburg Stock Exchange (JSE) using adjusted earnings as a part of an impression expectation management strategy focused on demonstrating how reported earnings measures meeting or beating analysts’ earnings forecasts. Design/methodology/approach A multiple response analysis approach is used. Earnings adjustments are coded according to a defined typology and assessed for their status as either valid or invalid. The number of occurrences of adjusted earnings measures over a five year period (2010-2014) meeting or beating analyst forecasts is calculated. Findings The use of adjusted earnings by JSE listed companies is a common occurrence. There is evidence to suggest that this is used part of an impression expectation management strategy. Most of the adjustments are invalid. When otherwise valid adjustments are used in a particular year, these are frequently repeated, and when adjusted earnings are reported, these normally exceed analysts’ forecasts. Research limitations/implications The paper is based on a relatively small sample from a single jurisdiction and limited time period. Nevertheless, the findings point to the need to revisit how financial performance is measured and reported, evaluate additional regulation to protect investors and understand in more detail exactly how and why companies use adjusted earnings as an impression expectation management tool. Originality/value The paper adds to the limited body of research on performance reporting outside of the USA and Europe. It also examines the use of adjusted earnings in a unique setting where, in addition to IFRS numbers, companies are required to report a mandatory adjusted earnings figure (headline earnings).

scholarly journals Is CSR performance related to disclosure tone in earnings announcements?

2019 ◽  
Vol 32 (2) ◽  
pp. 129-147
Author(s):  
Yu Lu ◽  
Steven Cahan ◽  
Diandian Ma
Keyword(s):  
Earnings Management ◽  
Financial Performance ◽  
Manufacturing Industry ◽  
Earnings Announcements ◽  
Positive Association ◽  
Socially Responsible ◽  
Content Type ◽  
Sensitivity Tests ◽  
Disclosure Tone ◽  
Corporate Social

Purpose This study aims to examine whether the disclosure tone in earnings announcements is related to a firm’s corporate social responsibility (CSR) performance. Design/methodology/approach Considering the lower likelihood of earnings management conducted by CSR-conscious firms, and the significant market impact of the tone of disclosure in the earnings announcements, the study investigates whether firms with good CSR performance attempt to influence investors’ judgements through “soft information” and, thus, produce earnings announcements with more positive tone. Specifically, it examines whether CSR performance is positively related to the optimistic disclosure tone in earnings announcements. Findings The study finds that more socially responsible firms exhibit a more optimistic tone in earnings announcements. The findings are robust to a variety of sensitivity tests and data from different years. Furthermore, the study finds that the positive association between CSR performance and disclosure tone in the earnings announcement is particularly apparent in the manufacturing industry. Research limitations/implications This study contributes to the literature in multiple ways. Practical implications These findings should assist regulators in better understanding the verbal components in earnings announcements. Social implications It is possible that firms might opportunistically engage in CSR activities to enhance their social image to exaggerate financial performance and influence investors’ 2019 decisions. Originality/value These results show that CSR performance is positively associated with the optimistic tone in earnings announcements. The findings are consistent with two alternative interpretations. First, even though CSR-conscious firms are unlikely to engage in earnings management, they may engage a more subtle form of impressions/tone management. Second, firms with better CSR performance may have better financial performance, and thus are more confident and optimistic, resulting in a more positive tone in their earnings announcements. As the study controls for financial performance and find a positive relation between CSR concerns and optimism in earnings announcements, it favors the previous explanation.

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