IDEAS home Printed from https://ideas.repec.org/a/eee/jocaae/v9y2013i1p100-121.html
   My bibliography  Save this article

Managerial risk-taking incentives and non-GAAP earnings disclosures

Author

Listed:
  • Bansal, Naresh
  • Seetharaman, Ananth
  • Wang, Xu (Frank)

Abstract

We investigate the association between risk-taking incentives provided by stock-based compensation arrangements and non-GAAP financial disclosures. Controlling for compensation to stock price sensitivity, we find that managers with higher compensation to stock volatility sensitivity (vega) are more likely to be associated with voluntary non-GAAP earnings information disclosures. In addition, higher-vega managers are found to be associated with more frequent and less opportunistic non-GAAP earnings information disclosures. Robust to alternative specifications and estimations, our findings suggest that compensation arrangements can encourage managers to make more, higher-quality voluntary non-GAAP disclosures.

Suggested Citation

  • Bansal, Naresh & Seetharaman, Ananth & Wang, Xu (Frank), 2013. "Managerial risk-taking incentives and non-GAAP earnings disclosures," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(1), pages 100-121.
    • Handle: RePEc:eee:jocaae:v:9:y:2013:i:1:p:100-121
    DOI: 10.1016/j.jcae.2013.03.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1815566913000076
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcae.2013.03.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December.
    2. Barclay, Michael J & Smith, Clifford W, Jr, 1995. "The Priority Structure of Corporate Liabilities," Journal of Finance, American Finance Association, vol. 50(3), pages 899-917, July.
    3. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
    4. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    5. Dirk E. Black & Theodore E. Christensen, 2009. "US Managers' Use of 'Pro Forma' Adjustments to Meet Strategic Earnings Targets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 297-326.
    6. Bipin Ajinkya & Sanjeev Bhojraj & Partha Sengupta, 2005. "The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 343-376, June.
    7. Leuz, C & Verrecchia, RE, 2000. "The economic consequences of increased disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 91-124.
    8. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    9. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    10. Bhattacharya, Nilabhra & Black, Ervin L. & Christensen, Theodore E. & Larson, Chad R., 2003. "Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 285-319, December.
    11. Heflin, Frank & Hsu, Charles, 2008. "The impact of the SEC's regulation of non-GAAP disclosures," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 349-365, December.
    12. Brockman, Paul & Martin, Xiumin & Puckett, Andy, 2010. "Voluntary disclosures and the exercise of CEO stock options," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 120-136, February.
    13. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
    14. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
    15. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563, Elsevier.
    16. Bushee, BJ & Noe, CF, 2000. "Corporate disclosure practices, institutional investors, and stock return volatility," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 171-202.
    17. Li, George, 2005. "Information Quality, Learning, and Stock Market Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(3), pages 595-620, September.
    18. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    19. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    20. Aboody, David & Kasznik, Ron, 2000. "CEO stock option awards and the timing of corporate voluntary disclosures," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 73-100, February.
    21. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    22. Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, vol. 55(5), pages 2311-2331, October.
    23. Larcker, David F. & Rusticus, Tjomme O., 2010. "On the use of instrumental variables in accounting research," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 186-205, April.
    24. Sonja Olhoft Rego & Ryan Wilson, 2012. "Equity Risk Incentives and Corporate Tax Aggressiveness," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 775-810, June.
    25. Allee, Kristian D. & Bhattacharya, Nilabhra & Black, Ervin L. & Christensen, Theodore E., 2007. "Pro forma disclosure and investor sophistication: External validation of experimental evidence using archival data," Accounting, Organizations and Society, Elsevier, vol. 32(3), pages 201-222, April.
    26. O. Ashenfelter & D. Card (ed.), 1999. "Handbook of Labor Economics," Handbook of Labor Economics, Elsevier, edition 1, volume 3, number 3.
    27. Rajgopal, Shivaram & Shevlin, Terry, 2002. "Empirical evidence on the relation between stock option compensation and risk taking," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 145-171, June.
    28. John Core & Wayne Guay, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, June.
    29. Lambert, Ra & Larcker, Df & Verrecchia, Re, 1991. "Portfolio Considerations In Valuing Executive-Compensation," Journal of Accounting Research, Wiley Blackwell, vol. 29(1), pages 129-149.
    30. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
    31. Mark T. Bradshaw & Richard G. Sloan, 2002. "GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 41-66, March.
    32. Lang, M & Lundholm, R, 1993. "Cross-Sectional Determinants Of Analyst Ratings Of Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 246-271.
    33. Givoly, Dan & Hayn, Carla, 2000. "The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 287-320, June.
    34. Ross, Stephen A, 1989. " Information and Volatility: The No-Arbitrage Martingale Approach to Timing and Resolution Irrelevancy," Journal of Finance, American Finance Association, vol. 44(1), pages 1-17, March.
    35. Paul Brockman & Xiumin Martin & Emre Unlu, 2010. "Executive Compensation and the Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, vol. 65(3), pages 1123-1161, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Denis Cormier & Samira Demaria, 2014. "Pertinence des mesures non-GAAP pour les marchés boursiers : le cas des firmes du CAC 40," GREDEG Working Papers 2014-22, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    2. Ding, Chao & Ho, Choy Yeing & Chang, Millicent, 2021. "CEO and CFO equity compensation and dividend payout over the firm lifecycle," Global Finance Journal, Elsevier, vol. 49(C).
    3. Sascha B. Herr & Peter Lorson & Jochen Pilhofer, 2022. "Alternative Performance Measures: A Structured Literature Review of Research in Academic and Professional Journals," Schmalenbach Journal of Business Research, Springer, vol. 74(3), pages 389-451, September.
    4. Bharati, Rakesh & Doellman, Thomas & Fu, Xudong, 2016. "CEO confidence and stock returns," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(1), pages 89-110.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hyungshin Park & Dimitris Vrettos, 2015. "The Moderating Effect of Relative Performance Evaluation on the Risk Incentive Properties of Executives’ Equity Portfolios," Journal of Accounting Research, Wiley Blackwell, vol. 53(5), pages 1055-1108, December.
    2. Jing Zhang & Jieun Chung, 2018. "Does geographical location matter for managerial compensation design?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(1), pages 1-32, January.
    3. Armstrong, Christopher S. & Vashishtha, Rahul, 2012. "Executive stock options, differential risk-taking incentives, and firm value," Journal of Financial Economics, Elsevier, vol. 104(1), pages 70-88.
    4. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    5. Edith Leung & David Veenman, 2018. "Non‐GAAP Earnings Disclosure in Loss Firms," Journal of Accounting Research, Wiley Blackwell, vol. 56(4), pages 1083-1137, September.
    6. Yangyang Chen & Cameron Truong & Madhu Veeraraghavan, 2015. "CEO Risk-Taking Incentives and the Cost of Equity Capital," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(7-8), pages 915-946, September.
    7. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 75-102, December.
    8. Cassell, Cory A. & Huang, Shawn X. & Manuel Sanchez, Juan & Stuart, Michael D., 2012. "Seeking safety: The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies," Journal of Financial Economics, Elsevier, vol. 103(3), pages 588-610.
    9. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    10. Qiang Cheng & Young Jun Cho & Jae B. Kim, 2021. "Managers’ pay duration and voluntary disclosures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(7-8), pages 1332-1367, July.
    11. Chu, Yongqiang & Liu, Ming & Ma, Tao & Li, Xinming, 2020. "Executive compensation and corporate risk-taking: Evidence from private loan contracts," Journal of Corporate Finance, Elsevier, vol. 64(C).
    12. Theodore E. Christensen & Enrique Gomez & Matthew Ma & Jing Pan, 2021. "Analysts’ role in shaping non-GAAP reporting: evidence from a natural experiment," Review of Accounting Studies, Springer, vol. 26(1), pages 172-217, March.
    13. Muurling, Rutger & Lehnert, Thorsten, 2004. "Option-based compensation: a survey," The International Journal of Accounting, Elsevier, vol. 39(4), pages 365-401.
    14. Paul Brockman & Tao Ma & Jianfang Ye, 2015. "CEO Compensation Risk and Timely Loss Recognition," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 204-236, January.
    15. de La Bruslerie, Hubert & Gabteni, Heger, 2014. "Voluntary disclosure of financial information by French firms: Does the introduction of IFRS matter?," Advances in accounting, Elsevier, vol. 30(2), pages 367-380.
    16. Bravo, Francisco, 2016. "Forward-looking disclosure and corporate reputation as mechanisms to reduce stock return volatility," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 19(1), pages 122-131.
    17. Jan Diebecker & Friedrich Sommer, 2017. "The impact of corporate sustainability performance on information asymmetry: the role of institutional differences," Review of Managerial Science, Springer, vol. 11(2), pages 471-517, March.
    18. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
    19. Michael Seamer, 2014. "Does Effective Corporate Facilitate Continuous Market Disclosure?," Australian Accounting Review, CPA Australia, vol. 24(2), pages 111-126, June.
    20. Gormley, Todd A. & Matsa, David A. & Milbourn, Todd, 2013. "CEO compensation and corporate risk: Evidence from a natural experiment," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 79-101.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jocaae:v:9:y:2013:i:1:p:100-121. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-contemporary-accounting-and-economics .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.