Shifting corporate culture: executive stock ownership plan adoptions and incentives to meet or just beat analysts’ expectations
- 991 Downloads
This paper investigates whether adoptions of executive stock ownership plans coincide with decreased incentives to meet or just beat analysts’ near-term EPS forecasts. Firms often assert that ownership plans focus executives on long-term performance. I find that the impact of these adoptions on meeting or just beating analysts’ EPS forecasts differs depending on whether the plan binds the CEO to reach ownership targets by a specified date. In particular, I find that firms that adopt plans requiring an increase in CEO ownership exhibit a lower propensity to meet or just beat earnings forecasts following plan adoptions. In contrast, firms that adopt plans that require no increase exhibit no change in the propensity to meet or just beat. The results suggest that firms use binding ownership plans to shift executives’ focus from near-term earnings benchmarks to long-term value creation.
KeywordsCorporate culture Analyst forecasts Managerial ownership Benchmark beating Corporate governance
JEL ClassificationD22 G32 G34 M41
This paper is based on my dissertation at the University of Iowa. I thank my dissertation committee members Dan Collins (co-chair), Paul Hribar (co-chair), Erik Lie, Dave Mauer, and Rick Mergenthaler. I also received helpful comments from Ciao-Wei Chen, Asher Curtis, Patricia Dechow (the editor), Peter Demerjian, Weili Ge, Tim Gray, Shane Heitzman, Jaewoo Kim, Sarah McVay, Paige Patrick, Katie Spangenberg, Joanna Wu, Ira Yeung (AAA discussant), Jerry Zimmerman, two anonymous reviewers, and workshop participants at Purdue University, Washington University in St. Louis, the Universities of California - Berkeley, Illinois, Iowa, Minnesota, Oregon, Rochester, and Washington, and the 2014 AAA Annual Meeting. Eric Haberkorn, Jiarui Han, Jon Ide, Ruby Boram Lee, Zhixiang Song, and Baoxing Sun provided excellent research assistance. I gratefully acknowledge generous financial support from the University of Washington.
- Ayco. (2012). Updated survey of share ownership guidelines and stock retention requirements. Ayco Compensation & Benefits Digest, 20(5), 1–8.Google Scholar
- Bushee, B. J. (1998). The influence of institutional investors on myopic R&D investment behavior. The Accounting Review, 73(3), 305–333.Google Scholar
- Core, J., Guay, W., & Larcker, D. (2003). Executive equity compensation and incentives: A survey. Federal reserve bank of New York economic policy review, April, 27–50.Google Scholar
- Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225.Google Scholar
- Degeorge, F., Patel, J., & Zeckhauser, R. (1999). Earnings Management to Exceed Thresholds. Journal of Accounting and Economics, 72(1), 1–33.Google Scholar
- Equilar. (2016). Executive stock ownership guidelines. Equilar 2016 stock ownership guidelines: Executive summary, 1–9.Google Scholar
- Graham, J. R., Harvey, C. R., Popadak, J. A., & Rajgopal, S. (2017). Corporate culture: The interview evidence. Working paper, Columbia University and Duke University.Google Scholar
- McMullin, J. L. & Schonberger, B. (2015). Entropy-balanced discretionary accruals. Working paper, Indiana University and University of Rochester.Google Scholar
- Mergenthaler, R., Rajgopal, S., & Srinivasan, S. (2012). CEO and CFO career penalties to missing quarterly analysts’ forecasts. Working paper, Columbia University, Harvard University, and University of Arizona.Google Scholar
- Roberts, M., & Whited, T. (2013). Endogeneity in empirical corporate finance. In G. M. Constantinides, M. Harris, & R. M. Stulz (Eds.), Handbook of the economics of finance. Amsterdam: Elsevier.Google Scholar