Relative Performance Goals and Management Earnings Guidance

We examine managers’ earnings forecasts for evidence of incentive alignment or subversion characteristics. We find that forecasts by managers compensated via relative performance (RP) goals are more likely to be pessimistic and less accurate than those by managers compensated via absolute performance (AP) goals. For firms not issuing earnings forecasts, disclosures in Form 10-Ks are more pessimistic for RP firms than for AP firms. Furthermore, we find that RP firms perform worse than AP firms in terms of future stock returns. Overall, our evidence is consistent with a proposition that, contrary to sound ethical business practices, RP managers make self-serving earnings disclosures to subvert the efforts of their peers to meet performance targets more easily.