CEO incentives and earnings prediction

Authors: James Jianxin Gong Siyi Li

Publish Date: 2012/05/20

Volume: 40, Issue: 4, Pages: 647-674

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Abstract

This study investigates whether information about Chief Executive Officer CEO incentives is useful for predicting future earnings We find that in companies with higher CEO equity incentives current year earnings are more informative of future earnings than in other companies Additionally in an earnings prediction setting CEO incentives are shown to provide information about future earnings that is incremental to current earnings or earnings components The predictive power of CEO incentives for future earnings is robust to the inclusion of other predictors of future earnings Furthermore we find that CEO incentives are predictive of “real” future earnings as represented by operating cash flow and nondiscretionary accruals but not predictive of future discretionary accruals Finally we find that financial analysts do not incorporate information about CEO incentives when they forecast future earnings This result suggests that incorporating CEO incentives can potentially improve analyst forecasts of future earningsThe authors would like to thank ChengFew Lee the editor and two anonymous reviewers for constructive suggestions The study has benefited from comments from Rashad Abdelkhalik Betty Chavis Alan Jiang Vivek Mande Mort Pincus Theodore Sougiannis and seminar participants at Shanghai Jiaotong University Nanjing University and Cal State Fullerton Academic Corporate Reporting and Governance Conference We gratefully acknowledge the financial support of the California State University at Fullerton and the University of Illinois at Chicago We appreciate the research assistance of Christina Chen Christine Cheng and Kate Poorbaugh

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