Hidden Gems: Do Market Participants Respond to Performance Expectations Revealed in Compensation Disclosures?

Authors

C. Edward Fee, Tulane UniversityFollow
Zhi Li, Chapman UniversityFollow
Qiyuan Peng, University of DaytonFollow

Document Type

Article

Publication Date

6-30-2022

Abstract

We find that a new compensation disclosure item on expected payouts from performance-based stock grants reveals unique information regarding future firm performance. Extracting inferred performance expectations from the disclosures, we find that firms disclosing the highest expected grant payout significantly outperform in ROA, Q, sales growth, and profit margin over the next two years, while those disclosing the lowest expected payout underperform. The embedded information is not captured by other information channels, such as managerial earnings guidance, 10-K sentiment, insider selling activities, unexplained CEO pay, and analyst forecasts. Investors and analysts do not fully incorporate the information and are later surprised around earnings announcement days. A portfolio that buys firms with the highest performance expectation and shorts firms with the lowest expectation earns significantly positive abnormal returns. Our findings suggest that the enhanced compensation disclosure contains valuable information, but investors underreact to information that is difficult to collect and process.

Comments

NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Accounting and Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Accounting and Economics in 2022. https://doi.org/10.1016/j.jacceco.2022.101519

The Creative Commons license below applies only to this version of the article.

Recommended Citation

C.E. Fee, Z. Li and Q. Peng, Hidden Gems: Do market participants respond to performance expectations revealed in compensation disclosures?, Journal of Accounting and Economics, https://doi.org/10.1016/j.jacceco.2022.101519

Peer Reviewed

1

Copyright

Elsevier

Creative Commons License

This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.