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.
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.
Included in
Business Administration, Management, and Operations Commons, Organizational Behavior and Theory Commons, Other Business Commons, Portfolio and Security Analysis Commons
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.