Review of Accounting Studies

, Volume 23, Issue 2, pp 654–685 | Cite as

Shifting corporate culture: executive stock ownership plan adoptions and incentives to meet or just beat analysts’ expectations

  • Phillip J. QuinnEmail author


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.


Corporate culture Analyst forecasts Managerial ownership Benchmark beating Corporate governance 

JEL Classification

D22 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.


  1. Allen, E. J., Dechow, P. M., Pope, D. G., & Wu, G. (2017). Reference-dependent preferences: evidence from marathon runners. Management Science, 63(6), 1657–1672.CrossRefGoogle Scholar
  2. Armstrong, C. S., Larcker, D. F., Ormazabal, G., & Taylor, D. J. (2013). The relation between equity incentives and misreporting: the role of risk-taking incentives. Journal of Financial Economics, 109(2), 327–350.CrossRefGoogle Scholar
  3. Ayco. (2012). Updated survey of share ownership guidelines and stock retention requirements. Ayco Compensation & Benefits Digest, 20(5), 1–8.Google Scholar
  4. Bang, H., & Robins, J. M. (2005). Doubly robust estimation in missing data and causal inference models. Biometrics, 61(4), 962–973.CrossRefGoogle Scholar
  5. Bebchuk, L., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance? Review of Financial Studies, 22(2), 783–827.CrossRefGoogle Scholar
  6. Bertrand, M., & Schoar, A. (2003). Managing with style: the effect of managers on firm policies. Quarterly Journal of Economics, 118(4), 1169–1208.CrossRefGoogle Scholar
  7. Bhojraj, S., Hribar, P., Picconi, M., & McInnis, J. (2009). Making sense of cents: an examination of firms that marginally miss or beat analyst forecasts. The Journal of Finance, 64(5), 2361–2388.CrossRefGoogle Scholar
  8. Bonsall, S. B., & Miller, B. P. (2017). The impact of narrative disclosure readability on bond ratings and the cost of debt. Review of Accounting Studies, 22(2), 608–643.CrossRefGoogle Scholar
  9. Brown, L. D., & Caylor, M. L. (2005). A temporal analysis of quarterly earnings thresholds: propensities and valuation consequences. The Accounting Review, 80(2), 423–440.CrossRefGoogle Scholar
  10. Brown, K., Chen, C., & Kennedy, D. (2017). Target ownership plans and earnings management. Advances in Accounting, 36, 87–101.CrossRefGoogle Scholar
  11. Burgstahler, D., & Chuk, E. (2015). Do scaling and selection explain earnings discontinuities? Journal of Accounting and Economics, 60(1), 168–186.CrossRefGoogle Scholar
  12. Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1), 99–126.CrossRefGoogle Scholar
  13. Bushee, B. J. (1998). The influence of institutional investors on myopic R&D investment behavior. The Accounting Review, 73(3), 305–333.Google Scholar
  14. Cassell, C. A., Dreher, L. M., & Myers, L. A. (2013). Reviewing the SEC’s review process: 10-K comment letters and the cost of remediation. The Accounting Review, 88(6), 1875–1908.CrossRefGoogle Scholar
  15. Chen, X., Harford, J., & Li, K. (2007). Monitoring: Which institutions matter? Journal of Financial Economics, 86(2), 279–305.CrossRefGoogle Scholar
  16. Cheng, Q., & Warfield, T. (2005). Equity Incentives and Earnings Management. The Accounting Review, 80(2), 441–476.CrossRefGoogle Scholar
  17. Collins, D. W., Pungaliya, R. S., & Vijh, A. M. (2016). The effects of firm growth and model specification choices on tests of earnings management in quarterly settings. The Accounting Review, 92(2), 69–100.CrossRefGoogle Scholar
  18. Core, J., & Guay, W. (2002). Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility. Journal of Accounting Research, 40(3), 613–630.CrossRefGoogle Scholar
  19. 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
  20. Core, J., Guay, W., & Larcker, D. (2008). The power of the pen and executive compensation. Journal of Financial Economics, 88(1), 1–25.CrossRefGoogle Scholar
  21. Core, J., & Larcker, D. (2002). Performance consequences of mandatory increases in executive stock ownership. Journal of Financial Economics, 64(3), 317–340.CrossRefGoogle Scholar
  22. DeBacker, J., Heim, B. T., & Tran, A. (2015). Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States. Journal of Financial Economics, 117(1), 122–138.CrossRefGoogle Scholar
  23. Dechow, P. M., & Sloan, R. G. (1991). Executive incentives and the horizon problem: An empirical investigation. Journal of Accounting and Economics, 14(1), 51–89.CrossRefGoogle Scholar
  24. Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225.Google Scholar
  25. Degeorge, F., Patel, J., & Zeckhauser, R. (1999). Earnings Management to Exceed Thresholds. Journal of Accounting and Economics, 72(1), 1–33.Google Scholar
  26. Demsetz, H., & Lehn, K. (1985). The Structure of Corporate Ownership: Causes and Consequences. Journal of Political Economy, 93(6), 1155–1177.CrossRefGoogle Scholar
  27. Dikolli, S. S., Mayew, W. J., & Nanda, D. (2014). CEO tenure and the performance-turnover relation. Review of Accounting Studies, 19(1), 281–327.CrossRefGoogle Scholar
  28. Equilar. (2016). Executive stock ownership guidelines. Equilar 2016 stock ownership guidelines: Executive summary, 1–9.Google Scholar
  29. Fama, E. F., & French, K. R. (1997). Industry costs of equity. Journal of Financial Economics, 43(2), 153–193.CrossRefGoogle Scholar
  30. Fee, C. E., Hadlock, C. J., & Pierce, J. R. (2013). Managers with and without style: Evidence using exogenous variation. Review of Financial Studies, 26(3), 567–601.CrossRefGoogle Scholar
  31. Feng, M., Li, C., & McVay, S. (2009). Internal control and management guidance. Journal of Accounting and Economics, 48(2), 190–209.CrossRefGoogle Scholar
  32. Frank, K. (2000). Impact of a Confounding Variable on the Inference of a Regression Coefficient. Sociological Methods and Research, 29(2), 147–194.CrossRefGoogle Scholar
  33. 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
  34. Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1–3), 3–73.CrossRefGoogle Scholar
  35. Greene, W. (2004). The behaviour of the maximum likelihood estimator of limited dependent variable models in the presence of fixed effects. The Econometrics Journal, 7(1), 98–119.CrossRefGoogle Scholar
  36. Guiso, L., Sapienza, P., & Zingales, L. (2015). The value of corporate culture. Journal of Financial Economics, 117(1), 60–76.CrossRefGoogle Scholar
  37. Hainmueller, J. (2012). Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies. Political Analysis, 20(1), 25–46.CrossRefGoogle Scholar
  38. Hanlon, M., Rajgopal, S., & Shevlin, T. (2003). Are executive stock options associated with future earnings? Journal of Accounting and Economics, 36(1–3), 3–43.CrossRefGoogle Scholar
  39. Heckman, J. J. (1979). Sample selection bias as a specification error. Econometrica, 47(1), 153–161.CrossRefGoogle Scholar
  40. Hoi, C. K., Wu, Q., & Zhang, H. (2013). Is corporate social responsibility (CSR) associated with tax avoidance? Evidence from irresponsible CSR activities. The Accounting Review, 88(6), 2025–2059.CrossRefGoogle Scholar
  41. Hribar, P., & Yang, H. (2015). CEO overconfidence and management forecasting. Contemporary Accounting Research, 33, 204–227.CrossRefGoogle Scholar
  42. Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228.CrossRefGoogle Scholar
  43. Keung, E., Lin, Z. X., & Shih, M. (2010). Does the stock market see a zero or small positive earnings surprise as a red flag? Journal of Accounting Research, 48(1), 91–121.CrossRefGoogle Scholar
  44. Krishnan, G. V., Raman, K. K., Yang, K., & Yu, W. (2011). CFO/CEO-board social ties, Sarbanes- Oxley, and earnings management. Accounting Horizons, 25(3), 537–557.CrossRefGoogle Scholar
  45. Lennox, C. S., Francis, J. R., & Wang, Z. (2011). Selection models in accounting research. The Accounting Review, 87(2), 589–616.CrossRefGoogle Scholar
  46. Loughran, T., McDonald, B., & Yun, H. (2009). A wolf in sheep’s clothing: the use of ethics- related terms in 10-K reports. Journal of Business Ethics, 89, 39–49.CrossRefGoogle Scholar
  47. Matsumoto, D. A. (2002). Management's incentives to avoid negative earnings surprises. The Accounting Review, 77(3), 483–514.CrossRefGoogle Scholar
  48. McMullin, J. L. & Schonberger, B. (2015). Entropy-balanced discretionary accruals. Working paper, Indiana University and University of Rochester.Google Scholar
  49. McVay, S., Nagar, V., & Tang, V. W. (2006). Trading incentives to meet the analyst forecast. Review of Accounting Studies, 11(4), 575–598.CrossRefGoogle Scholar
  50. 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
  51. Payne, J. L., & Thomas, W. B. (2003). The implications of using stock-split adjusted I/B/E/S data in empirical research. The Accounting Review, 78(4), 1049–1067.CrossRefGoogle Scholar
  52. 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
  53. Rosenbaum, P. R. (2002). Observational studies (2nd ed.). Berlin: Springer Series in Statistics.CrossRefGoogle Scholar
  54. Rosenbaum, P. R., & Rubin, D. B. (1983). The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1), 41–55.CrossRefGoogle Scholar
  55. Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370.CrossRefGoogle Scholar
  56. Smith, C. W., & Watts, R. L. (1992). The investment opportunsity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics, 32(3), 263–292.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.University of WashingtonSeattleUSA

Personalised recommendations