Ken W. Shaw
University of Missouri–Columbia
Mark P. Bauman
University of Wisconsin–Milwaukee
Abstract: Managerial compensation plans frequently include stock options in order to better align the interests of managers and outside shareholders and reduce agency problems. Since option values are sensitive to fluctuations in stock prices, managers of firms with sizable option components in their compensation plans have increased incentives to report earnings that meet or exceed analysts' forecasts. We show that the propensity to meet or beat analysts' quarterly earnings forecasts is positively related to the extent to which the firm employs options in its compensation plan. This effect appears driven more by discretionary accounting accruals than by management's guidance to analysts.
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