Essay I: The Information of Range Forecast Boundaries

Abstract: This paper studies whether meeting or beating the upper and lower boundaries of management range forecasts are signals of better future performance, and whether the market uses this information to value firms. Drawing on Trueman (1986), we hypothesize that meeting/beating their own earnings forecasts signals managers' capability to deliver the performance as planned, therefore indicating management's potential to achieve better performance in the future. Consistent with our prediction, we find that firms meeting or beating either boundary of range forecasts have significantly better future performance when other factors are controlled. Moreover, firms meeting or beating the upper bound have better future performa...[ Read more ]

Essay I: The Information of Range Forecast Boundaries

Abstract: This paper studies whether meeting or beating the upper and lower boundaries of management range forecasts are signals of better future performance, and whether the market uses this information to value firms. Drawing on Trueman (1986), we hypothesize that meeting/beating their own earnings forecasts signals managers' capability to deliver the performance as planned, therefore indicating management's potential to achieve better performance in the future. Consistent with our prediction, we find that firms meeting or beating either boundary of range forecasts have significantly better future performance when other factors are controlled. Moreover, firms meeting or beating the upper bound have better future performance than those merely meeting or beating the lower bound. We further find that the market anticipates management's capabilities in meeting or beating the lower bound following the issuance of management forecasts, but that it cannot predict whether firms can meet or beat the upper bound until the earnings announcement. As a result, we find a premium on earnings announcement date for firms meeting or beating the upper bound but not for firms merely meeting or beating the lower bound. Overall, the findings suggest that 1) range forecast boundaries are informative earnings benchmarks of future performance, as beating/meeting their own forecasts signals managers’ ability to managing the business; 2) meeting or beating upper bound is a better indicator of future performance than the lower bound, since upper bound is a tougher target for the management to beat; and 3) the market fully anticipates and prices managers' capability to meet/ beat the lower bound before earnings announcement but prices the information of meeting/beating upper bound on earnings announcement date.

Essay II: Disclosing Executive Information in an Annual Report: Determinants and Consequences

Abstract: Although compensation is paid in a monetary format, executives are motivated in a variety of ways beyond monetary compensation. In this paper, we investigate one such mechanism: disclosing executive information in annual report. We hypothesize that disclosing executive information in annual report provides incentives for executives to maximize shareholder value and we examine whether a higher level of executive information disclosure in annual report is associated with lower level of explicit compensation-related incentives. We find that explicit incentives, measured by the change in dollar value of the top five executives’ stocks and options for a 1% change in the firm’s stock price, are lower among firms with greater executive information disclosure in annual report. Further tests reveal the negative association between explicit incentives and such disclosure to be weaker when a firm’s performance or information environment is good. We also find firms with more independent directors on the board to be more likely to disclose executive information in annual report. Disclosing executive information in annual report is an efficient scheme to motivate executives in terms of saving monetary costs. Therefore, our result is consistent with previous findings that more independent boards are more likely to adopt efficient incentive schemes.