Moral Hazard, Firms’ Internal Governance and Management Earnings Forecasts

54 Pages Posted: 28 Jul 2010

See all articles by Jimmy Lee

Jimmy Lee

Singapore Management University - School of Accountancy

Date Written: September 9, 2009

Abstract

This paper investigates the role of management earnings forecasts in mitigating information asymmetry between investors and managers relating to moral hazard, and explains how earnings guidance facilitates monitoring. I demonstrate that firms that are more susceptible to moral hazard problems and more difficult to monitor are also more likely to issue annual earnings forecasts and they do so more frequently. In addition, I examine how firm internal governance drives forecasting decisions and show that stronger board governance and managerial equity incentives are associated with higher likelihood and frequency of forecast issuance. Finally, I provide robust evidence that managerial equity incentives are associated with more informative and higher quality guidance. In particular, I find that these forecasts are more accurate, unbiased, more specific and timely, consistent with equity incentives aligning shareholders’ and managers’ interests regarding disclosure decisions. However, I find mixed evidence on the association between board governance and forecast quality.

Keywords: Earnings guidance, corporate governance, executive compensation

JEL Classification: G34, J33, M41

Suggested Citation

Lee, Jimmy, Moral Hazard, Firms’ Internal Governance and Management Earnings Forecasts (September 9, 2009). Available at SSRN: https://ssrn.com/abstract=1650289 or http://dx.doi.org/10.2139/ssrn.1650289

Jimmy Lee (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore
(65) 6808 5234 (Phone)

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