CEO Compensation Mix and Analysts' Forecast Accuracy and Bias

40 Pages Posted: 6 Jan 2006

See all articles by Kiridaran (Giri) Kanagaretnam

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Robert Mathieu

Wilfrid Laurier University

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: December 2005

Abstract

We investigate the relation between the proportion of total compensation received by CEOs from stock options and the accuracy and bias of analysts' earnings forecasts. We hypothesize that forecast accuracy decreases as the proportion of stock option pay increases. Higher proportions of stock options induce managers to undertake riskier projects, to change and/or reallocate their effort, to manipulate accounting earnings, and to make opportunistic voluntary disclosures, resulting in an increase in the complexity of forecasting. We also examine the relation between forecast bias and the proportion of stock option pay. Analysts' optimistic forecast bias increases as the proportion of stock option pay increases. Because forecast complexity increases with stock option pay, analysts, needing greater access to management's information to produce accurate forecasts, have incentives to increase the optimistic bias in their forecasts. Our empirical evidence indicates that analysts' earnings forecast accuracy decreases and forecast optimism increases as the proportion of CEO compensation from stock options increases, even after controlling for previously identified determinants of forecasting difficulty.

Keywords: CEO compensation, Stock options, Analysts' forecast accuracy, Analysts' forecast bias

JEL Classification: G29, J33, M41, M43, M52

Suggested Citation

Kanagaretnam, Kiridaran and Mathieu, Robert and Lobo, Gerald J., CEO Compensation Mix and Analysts' Forecast Accuracy and Bias (December 2005). Available at SSRN: https://ssrn.com/abstract=874075 or http://dx.doi.org/10.2139/ssrn.874075

Kiridaran Kanagaretnam (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Robert Mathieu

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5
Canada
519-884-1970, x3142 (Phone)

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
966
Abstract Views
3,673
Rank
44,124
PlumX Metrics