Option Compensation and Optimistic Bias in Management’s Earnings Forecasts

Yu-Ho Chi (), David A Ziebart () and Terry Campbell ()
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Yu-Ho Chi: College of Business in Accounting, University of Tennessee at Martin, USA
David A Ziebart: Von Allmen School of Accountancy University of Kentucky, USA
Terry Campbell: Department of Accounting, Kelley School of Business, Indiana University, USA

Journal of Finance and Accounting Research, 2019, vol. 1, issue 2, 1-26

Abstract: We examine the relation between the option compensation received by corporate managers and the extent of optimistic bias in their earnings forecasts. Specifically, we are interested in the extent to managers with a high amount of option compensation tend to have a self-serving optimism. We examine whether there is evidence consistent with the argument that managers have a self-serving interest to issue optimistic forecasts since their compensation is a function of stock price and higher earnings usually result in a higher share price. We hypothesize that management’ optimism (optimistic bias in their earnings forecasts) increases as their stock option compensation increases. Our empirical evidence indicates that highly compensated managers are associated with the likelihood of issuing upwardly biased (i.e. more optimistic) earnings forecasts.

Keywords: Management earnings forecast; Forecast error; Optimistic bias; Option compensation (search for similar items in EconPapers)
JEL-codes: G17 (search for similar items in EconPapers)
Date: 2019
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