Executive Compensation and Analyst Guidance: The Link between CEO Pay and Expectations Management

During the last decade, a surprisingly high percentage of U.S. companies has fulfilled or beaten analysts’ earnings per share forecasts. One of the most frequently cited reasons for this growing tendency is a change in the nature of U.S. executive compensation structure. As stock options have become an increasingly important part of executive compensation, the preservation or enhancement of short term stock value around the earnings announcement has become a priority for managers. Besides earnings management, a widespread way to meet analyst expectations is to inject pessimism into their forecasts by providing analysts with negative clues, or so-called downward guidance. This paper is the first to investigate the relationship between the practice of analyst guidance and executive compensation packages. We document a strong link between expectations management and the relevant options component of CEO compensation, bonus plan payments, and the value of the firm's shares owned by its managing CEO. In a second set of tests, we show that firms that meet or beat analyst forecasts at the earnings announcement generate positive abnormal returns, which are significantly lower for firms suspected of managing expectations.Analyst guidance; Earnings surprise; Executive compensation; Stock options

Who are the Best? Local Versus Foreign Analysts on the Latin American Stock Markets

This paper investigates the relative performance of local and foreign financial analysts on Latin American emerging markets. There is strong evidence that foreign financial analysts outperform local analysts on these markets. Foreign analysts produce more timely and more accurate forecasts. A significant price reaction is observed following their downward forecast revisions. Therefore foreign investors do not necessarily need to open relations with local financial analysts when they want to trade on these markets. The results are consistent with previous evidence that documents a better information and greater sophistication on the part of foreign investors on overseas markets.analysts’ forecasts; home bias; international diversification; emerging markets; herding behaviour

Working Paper Series Executive Compensation and Analyst Guidance: The Link between CEO Pay and Expectations Management Executive Compensation and Analyst Guidance: The Link between CEO Pay and Expectations Management Executive Compensation and Analyst Gui

Abstract During the last decade, a surprisingly high percentage of U.S. companies has fulfilled or beaten analysts' earnings per share forecasts. One of the most frequently cited reasons for this growing tendency is a change in the nature of U.S. executive compensation structure. As stock options have become an increasingly important part of executive compensation, the preservation or enhancement of short term stock value around the earnings announcement has become a priority for managers. Besides earnings management, a widespread way to meet analyst expectations is to inject pessimism into their forecasts by providing analysts with negative clues, or so-called downward guidance. This paper is the first to investigate the relationship between the practice of analyst guidance and executive compensation packages. We document a strong link between expectations management and the relevant options component of CEO compensation, bonus plan payments, and the value of the firm's shares owned by its managing CEO. In a second set of tests, we show that firms that meet or beat analyst forecasts at the earnings announcement generate positive abnormal returns, which are significantly lower for firms suspected of managing expectations

Executive Compensation and Analyst Guidance: The Link between CEO Compensation and Expectations Management Executive Compensation and Analyst Guidance: The Link between CEO Compensation and Expectations Management

Abstract During the last decade, a surprisingly high percentage of U.S. companies has fulfilled or beaten analysts' earnings per share forecasts. One of the most frequently cited reasons for this growing tendency is a change in the nature of U.S. executive compensation structure. As stock options have become an increasingly important part of executive compensation, the preservation or enhancement of short term stock value around the earnings announcement has become a priority for managers. Besides earnings management, a widespread way to meet analyst expectations is to inject pessimism into their forecasts by providing analysts with negative clues, or so-called downward guidance. This paper is the first to investigate the relationship between the practice of analyst guidance and executive compensation packages. We document a strong link between expectations management and the relevant options component of CEO compensation, bonus plans, and the percentage of the company's shares owned by the CEO who manages it. In a second set of tests, we show that firms which meet or beat analyst forecasts at the earnings announcement generate abnormal returns, which are significantly lower for firms suspected of managing expectations

The impact of covariance misspecification in risk-based portfolios

The equal-risk-contribution, inverse-volatility weighted, maximum-diversification and minimum-variance portfolio weights are all direct functions of the estimated covariance matrix. We perform a Monte Carlo study to assess the impact of covariance matrix misspecification to these risk-based portfolios at the daily, weekly and monthly forecasting horizon. Our results show that the equal-risk-contribution and inverse-volatility weighted portfolio weights are relatively robust to covariance misspecification. In contrast, the minimum-variance portfolio weights are highly sensitive to errors in both the estimated variances and correlations, while errors in the estimated correlations can have a large effect on the weights of the maximum-diversification portfolio