Uncertainty about managers’ reporting objectives and investors’ response to earnings reports: Evidence from the 2006 executive compensation disclosures

Fabrizio Ferri, Ronghuo Zheng, Yuan Zou

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

We examine whether the information content of the earnings report, as captured by the earnings response coefficient (ERC), increases when investors’ uncertainty about the manager's reporting objectives decreases, as predicted in Fischer and Verrecchia (2000). We use the 2006 mandatory compensation disclosures as an instrument to capture a decrease in investors’ uncertainty about managers’ incentives and reporting objectives. Employing a difference-in-differences design and exploiting the staggered adoption of the new rules, we find a statistically and economically significant increase in ERC for treated firms relative to control firms, largely driven by profit firms. Cross-sectional tests suggest that the effect is more pronounced in subsets of firms most affected by the new rules. Our findings represent the first empirical evidence of a role of compensation disclosures in enhancing the information content of financial reports.

Original languageEnglish (US)
Pages (from-to)339-365
Number of pages27
JournalJournal of Accounting and Economics
Volume66
Issue number2-3
DOIs
StatePublished - Nov 1 2018

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Disclosure
Executive compensation
Managers
Uncertainty
Investors
Information content
Earnings response coefficients
Incentives
Empirical evidence
Profit
Difference-in-differences

Keywords

  • Compensation disclosures
  • Earnings response coefficient (ERC)
  • SEC rules

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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