Consequences of voluntary disclosure for CEOs: Evidence from issuing earnings guidance in the face of an earnings surprise.

摘要

Some CEOs decide to voluntarily issue warnings (tip-offs) when they expect a negative (positive) earnings surprise. Prior research suggests that warnings have incremental information beyond actual earnings and warning firms tend to experience permanent, instead of transitory, earnings losses. This paper investigates whether boards of directors use warnings or tip-offs when evaluating CEO performance. In particular, this study examines the effect of warnings and tip-offs on CEO annual bonus, option grants, and turnover. I find that warnings are significantly negatively associated with CEO bonus and positively associated with option grants. This finding indicates that boards of directors adjust CEO compensation toward a more future-oriented structure after warnings are issued. I also find that after warnings are issued, the sensitivity of bonus to stock returns increases significantly, while the sensitivity of option grants to stock returns does not differ from that of non-warning firms. Furthermore, I provide evidence that both CEOs' bonus and option grants incorporate peer firms' performance (both the stock returns and the information content from warnings) to filter out the external shocks that are common to the industry peers. In contrast, I find little evidence that tip-offs affect CEO bonus and option grants. Lastly, I show that as another potential direct benefit for CEOs, issuing warnings reduces CEO turnover. Overall, these findings suggest that the signal from warnings is used in determining CEO compensation and job retention. In addition, my findings provide new insights into the trade-off between bonus, option grants and job retention when CEOs issue management earnings guidance in the face of an earnings surprise.