Earnings forecasts of female CEOs: quality and consequences

This study examines the voluntary disclosure of earnings forecasts by female CEOs. We find that in the backdrop of increased pressure to perform from investors and other stakeholders, female CEOs tend to issue more earnings forecasts than male CEOs, and those forecasts are more accurate. We also find that while financial analysts generally prefer to follow companies headed by male CEOs, female CEOs’ efforts to issue accurate earnings forecasts pay off, as these efforts help them close the analyst coverage gap. We provide complementary evidence on the disclosure efforts of female CEOs with regard to updates to the forecast and the 10-K report. Lastly, we show that financial analysts rely more on the earnings forecasts of female CEOs, possibly because they recognize female CEOs’ superior forecasting quality. Our results are robust to the use of alternative research designs, including difference-in-difference, propensity score matching, and entropy balancing. Overall, our study documents gender differences in voluntary disclosure by senior management.

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

This study provides plausible causal evidence on the effect of executive equity incentives on opportunistic manager behavior. I exploit a unique setting created by the introduction of Financial Accounting Standard (FAS) 123R in 2005, which led to an exogenous increase in the cost of option pay, causing a substantial decline in option pay for some firms while leaving others largely unaffected. Using difference-in-differences analyses with a treatment group of firms that show a decline in option pay and two control groups, I find that the likelihood of a treatment firm meeting or beating analyst forecasts decreases by 14–20%. The results show that the relatively high levels of meet-or-beat before FAS 123R were largely driven by real activities manipulation such as abnormal asset sales and sales manipulation to beat analysts’ benchmarks, while accrual manipulation and analyst management were less relevant. Together, the results suggest that equity incentives encourage opportunistic actions to meet or beat earnings expectations, and a decline in option pay results in a decline in earnings management to meet earnings expectations.

Attention to dividends, inattention to earnings?

We examine whether dividends serve as substitutes or complements to accounting information in firm valuation. Consistent with dividends substituting for earnings information, we find that dividend paying firms have 11%–15% lower earnings response coefficients (ERCs) than non-payers. We find more substitution when the dividend provides a stronger signal of permanent earnings: when the firm is less likely to cut the dividend, when the firm is likely to fund the dividend out of earnings rather than cash reserves, or when the dividend is larger. We then show that dividend payers have lower absolute returns, less trading volume, and fewer analyst forecasts at the earnings announcement (EA), suggesting that dividend payers attract less attention to their less informative EAs. Finally, we show that the lower EA attention translates into less earnings management and fewer earnings-related disclosures for dividend payers relative to non-payers. Collectively, this evidence suggests that dividends supply information about permanent earnings and, although costly, could be an efficient way for some firms to satisfy investors’ demand for earnings information.

Brokerage trading volume and analysts’ earnings forecasts: a conflict of interest?

Using unique new data, we examine whether brokerage trading volume creates a conflict of interest for analysts. We find that earnings forecast optimism is associated with higher brokerage volume, even controlling for forecast and analyst quality, recommendations, and target prices. However, forecast accuracy is also significantly associated with higher volume. When analysts change brokerage houses, they bring trading volume with them, influencing trading volume at the new brokerage. This indicates that analysts drive the volume effects we observe. Consistent with a reward for generating volume, brokerage houses are less likely to demote analysts who generate more volume. Finally, analysts strategically adjust forecast optimism based on expected volume impact. Analysts become more (less) optimistic if their optimistic forecasts in the prior year were more (less) successful at generating volume. However, consistent with higher costs to increasing accuracy, analysts do not update accuracy based on expected volume impact. Overall, our results are consistent with a brokerage trading volume conflict of interest moving analysts towards more optimistic earnings forecasts, despite the volume reward for accuracy.