Topic: Guide Pessimistically before the Annual Incentive Plan Approval
Speaker: Jun Yang, Associate Professor of Finance, Kelley School of Business, Indiana University.
Date: December 7th (Wednesday.)
Location: Building 1, Room 200
Corporate boards determine the performance metric for CEOs’ annual incentive plans (AIP) at compensation committee meetings at the beginning of a fiscal year. We show that management issues downward-biased earnings guidance before these meetings that leads to a negative revision of analyst forecasts, which serve as an anchor for setting the performance goal in the AIP. This downward bias in earnings guidance is present when the performance metric is linked to earnings such as Earnings-Per-Share (EPS), but not when the performance metric is linked to revenue. In addition, pessimistic guidance is more pronounced when analyst forecasts are optimistic, or when shareholders actively monitor the firm. We find that pessimist event-window guidance is less pronounced for young and new CEOs. Last, CEOs have lower EPS performance targets and receive higher bonus payout for firms issuing more pessimistic event-window guidance.
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