Articlegreen2014

Are CEOs and CFOs Rewarded for Disclosure Quality?

130 citations0/0 files storedThe Accounting Review

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

ABSTRACT This study provides evidence regarding the importance that boards of directors place on effective communication with the investor community by examining whether CEO and CFO compensation are related to the quality of the firm's financial disclosures. Using an index derived from analyst forecast characteristics and management forecast accuracy to measure disclosure quality, we find changes in the annual bonus for both the CEO and CFO to be positively associated with changes in disclosure quality. We also find that the relation is stronger for high-growth firms, firms that have stronger governance structures, and for executives with lower equity incentives. Overall, our findings provide insight into the importance that boards place on effective communication with investors as a responsibility of the CEO and CFO and, therefore, provide them with contractual incentives to address the moral hazard problem associated with voluntary disclosures. JEL Classifications: M41.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1979Moral Hazard and Observability 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 1982Moral Hazard in Teams 1991Disclosure, Liquidity, and the Cost of Capital 1997Disclosure level and the cost of equity capital.2004Information and the Cost of Capital 1996Corporate Disclosure Policy and Analyst Behavior.

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