An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Lynn Rees
University of Houston

Anup Srivastava
Texas A&M University

Senyo Tse
Texas A&M University

Abstract: Recent studies suggest that earnings guidance frequency increases with option compensation, but provide mixed evidence on whether managers attempt to increase the value of their options by issuing negative information before stock option grants. We extend this research by investigating the joint effects of stock option plan features (grants, exercises, holdings)on the frequency and direction of earnings guidance. We find that guidance frequency increases with stock option features. We also find that guidance direction (downward, neutral, or upward) is consistent with opportunistic behavior to increase option compensation. However, we find no evidence that the resulting guidance is biased or that managers’ seemingly selective disclosures harm investors by reducing analysts’ forecast accuracy. Indeed, stock option plans are associated with increased analyst forecast accuracy, consistent with reduced information asymmetry between managers and investors for firms with stock option plans.

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