The Effect of CEO Extraversion on Analyst Forecasts: Stereotypes and Similarity Bias

In an experiment with professional analysts, we study their reliance on CEO personality information when producing financial forecasts. Drawing on social cognition research, we suggest analysts apply a stereotyping heuristic, believing that extraverted CEOs are more successful. The between‐subjects results with CEO extraversion as treatment variable confirm that analysts issue more favorable forecasts (earnings per share, long‐term earnings growth, and target price) for firms led by extraverted CEOs. Increased forecast uncertainty leads to even stronger stereotyping. Additionally, personality similarity between analysts and CEOs has a large effect on financial forecasts. Analysts issue more positive forecasts for CEOs similar to themselves.     

Voluntary disclosure,mandatory disclosure and the cost of capital

We examine the association between a firm's cost of capital and its voluntary and mandatory disclosures. We include two types of mandatory disclosure: those that are a function of periodic reports that are realizations of ex‐ante reporting systems and those that arise due to specific corporate events. To capture a firm's voluntary and event‐driven mandatory disclosures, we use information the firm provides via 8K filings. To capture periodic mandatory disclosures, we use earnings quality measures derived from the literature. Consistent with endogenous relations predicted by theory, we find that voluntary disclosure and both types of mandatory disclosure are correlated, although only event‐driven mandatory disclosures are significant in models that explain voluntary disclosure. We also find that the cost of capital is generally influenced by each of these disclosure types. We also find that controlling for periodic mandatory disclosure does not affect the relationship between voluntary disclosure and the cost of capital, while controlling for event‐driven mandatory disclosure sometimes affects the relationship depending on the measures used. Our study suggests that a firm's disclosure environment includes the three types of disclosure examined, although the inclusion of mandatory disclosures does not affect the measured association between voluntary disclosure and the cost of capital.     

Earnings Warnings and CEO Welfare

Some CEOs decide voluntarily to issue a warning when they expect a negative earnings surprise. Prior research suggests that warnings contain incremental information beyond actual earnings; warning firms tend to experience permanent earnings decreases. This paper investigates whether compensation committees take warnings into account in setting CEO compensation. We find that warnings are significantly negatively (positively) associated with CEO bonus (option grants), suggesting that compensation committees adjust CEO compensation towards a more high‐powered structure after warnings. However, the sensitivity of bonus or option grants to earnings and stock returns is not affected except for bonus sensitivity to stock returns. We also find weak evidence of an increase in forced CEO turnover after warnings, accompanied by a significant increase in its sensitivity to stock returns. This benefits CEOs with higher ability but imposes more risk on other CEOs. These findings provide a partial explanation of why not every CEO facing a negative surprise decides to issue a warning. Our results are robust to various specifications. In particular, the impact of warnings on compensation appears invariant to the timing or the number of warnings. Overall, these findings suggest that the signal from warnings is used in determining CEO compensation and retention.     

Manager‐Specific Effects on Earnings Guidance: An Analysis of Top Executive Turnovers

We investigate how managers contribute to the provision of earnings guidance by examining the association between top executive turnovers and guidance. Although firm and industry characteristics are important determinants of guidance, we conclude that CEOs participate in firm‐level policy decisions, whereas CFOs are involved in the formation or discussion of guidance. Among firms that historically issued frequent guidance, breaks in guidance following CEO turnovers are relatively permanent and are potentially attributable to firm‐initiated changes in guidance policy. Breaks following CFO turnovers, however, likely reflect uncertainty on the part of the newly appointed executive—they are concentrated in the two quarters following the turnover, are associated with the background of the newly appointed CFO, and extend to the relative precision of the guidance. Among firms that did not issue guidance historically, we find some evidence that newly appointed externally hired CEOs increase the likelihood of providing guidance.     

Stock price response to new‐CEO earnings news

New‐CEO earnings news exhibits asymmetric effects on stock prices. Stock prices rise more on good earnings news announced by firms with new CEOs compared with those with established CEOs. By contrast, stock prices tend to fall by a smaller amount on bad earnings news for new CEOs. Both the new‐CEO quality effect and the new‐CEO honeymoon effect are more pronounced for CEOs appointed during challenging situations. The new‐CEO quality effect is stronger for firms followed by fewer analysts, while the honeymoon effect is stronger for firms followed by more analysts – illustrating the importance of a transparent information environment.     

Value or Glamour? An empirical investigation of the effect of celebrity CEOs on financial reporting practices and firm performance

In this study, I investigate the impact of managerial reputation, as proxied by high‐profile awards to CEOs, on financial reporting practices and firm performance. Using a sample of 269 awards given to 189 celebrity CEOs (CEOs who win awards) from 1987 to 2003, I compare within‐firm changes in financial reporting practices and firm performance before and after each CEO wins their first award. I find that celebrity CEOs engage in more conservative accounting practices and are less likely to engage in opportunistic earnings management to meet short‐term earnings benchmarks. In addition, firm performance improves after celebrity CEOs win awards.     

The mediating effect of REM on the relationship between CEO overconfidence and subsequent firm performance moderated by IFRS adoption: A moderated-mediation analysis

The present paper is pursuing a new direction in the analysis of behavioral finance based on examining whether future performance of the firm is related to overconfidence displayed by the Chief Executive Officer (CEO). We suggest two channels for this relationship, real earnings management (REM) and the mandatory IFRS adoption. First, examining the impact of IFRS adoption on firms’ future performance, we find that overconfident CEOs who do not adopt IFRS exhibit poorer future performance. Other interactions related to overconfidence and IFRS are not significant. Second, examining the relationship between overconfidence and IFRS adoption on REM, we find that overconfident CEOs indulge in higher REM than non-overconfident CEOs. Further, overconfident CEOs who adopt IFRS display greater REM than do those who not adopt IFRS. Therefore, we prove that the indirect effect of CEO overconfidence on the subsequent firm performance through REM is contingent on the mandatory IFRS adoption.     

Outsider CEOs and corporate debt

We examine the extent to which outsider chief executive officers (CEOs) influence corporate financial leverage policies. We define an outsider CEO as one who appears in the reporting year and became CEO either immediately upon joining or within 3 months of joining a firm. There are arguments in the literature that the selection of an outsider CEO can either increase or decrease financial leverage. We investigate this issue using 11,118 Australian firm-year observations from 1216 firms listed during the period 2001–2015. Our findings suggest that, in the short-term after their appointment, outsider CEOs reduce firm dependence on debt. This result is robust to several additional tests and four measures to minimize endogeneity concerns. However, with an increase in their tenure at the firm, outsider CEOs revert to greater dependency on corporate debt. After supplementary analyses, we determine that the outsider CEOs short-term strategy of reducing financial leverage involves using cash reserves and restricting dividends to reduce existing debt. Instead, outsider CEOs finance capital expenditure projects thus providing a positive signal to the market that such CEOs are more creditworthy. Our results also suggest that outsider CEOs exercise more control over financial leverage when they have specialist attributes.     

Shareholder activism and voluntary disclosure

We examine the relation between shareholder activism and voluntary disclosure. An important consequence of voluntary disclosure is less adverse selection in the capital markets. One class of traders that finds less adverse selection unprofitable is activist investors who target mispriced firms whose valuations they can improve. Consistent with this idea, we find that managers issue earnings and sales forecasts more frequently when their firm is more at risk of attack by activist investors, and that these additional disclosures reduce the likelihood of becoming an activist’s target. These additional disclosures also prompt a positive price reaction, contain more precise guidance, and exceed prevailing market expectations. These findings imply that managers use voluntary disclosure to preempt activism at their firm, and that activists prefer to target relatively opaque firms.     

Management earnings forecasts and IPO performance: evidence of a regime change

Companies undertaking initial public offerings (IPOs) in Greece were obliged to include next-year profit forecast in their prospectuses, until the regulation changed in 2001 to voluntary forecasting. Drawing evidence from IPOs issued in the period 1993–2015, this is the first study to investigate the effect of disclosure regime on management earnings forecasts and IPO long-term performance. The findings show mainly positive forecast errors (forecasts are lower than actual earnings) and higher long-term returns during the mandatory period, suggesting that the mandatory disclosure requirement causes issuers to systematically bias profit forecasts downwards as they opt for the safety of accounting conservatism. The mandatory disclosure requirement artificially improves IPO share performance. Overall, our results show that mandatory disclosure of earnings forecasts can impede capital market efficiency once it goes beyond historical financial information to involve compulsory projections of future performance.     

CEO happiness and forecasting

We utilize the IBM Watson Tone Analyzer to measure chief executive officers' (CEOs') levels of joy (happiness) in year-end conference calls, and empirically test how CEOs' happiness affects the properties of their own and analysts' forecasts. We find that joyful CEOs are more likely to issue forecasts, less likely to miss their forecast targets, and exhibit lower optimistic bias in their forecasts. When joyful CEOs issue earnings forecasts, analysts revise their forecasts upwards and produce forecasts that are less dispersed and more accurate. Our results demonstrate that inherent CEO happiness significantly impacts the forecast properties of both managers and analysts, thus supporting upper echelons theory.     

Meeting or Missing Earnings Benchmarks: The Role of CEO Integrity

This paper examines the role of CEO integrity in determining whether a company's earnings benchmarks will be met, beaten or missed. Prior literature provides evidence that managers have incentives for meeting or beating earnings benchmarks and are rewarded by the market for doing so (Lopez and Rees, 2002; and Skinner and Sloan, 2002). Managers also have incentives to miss their earnings targets for the benefit of a lower strike price on subsequent option grants (McAnally et al., 2008). A CEO's involvement in backdating is taken here as a measure of his or her integrity. This paper shows that CEO integrity significantly influences whether benchmarks are met or beaten. In other words, backdating CEOs are more likely to meet or narrowly beat all three earnings benchmarks examined in the paper: positive earnings, last year's earnings and analysts’ forecasts. At the same time, they are also less likely to narrowly miss a zero‐earnings benchmark. The results presented in this paper further validate the use of benchmark meeting/beating as a measure of earnings manipulation.     

CEO Overconfidence and Earnings Management During Shifting Regulatory Regimes

This study examines the relationship of CEO overconfidence with accrual‐based earnings management, real activities‐based earnings management, and targeting to meet or just beat analyst forecasts. Following, we measure “overconfidence” based on the CEO's tendency to hold in‐the‐money stock options, as rational expected utility maximizers should exercise early to avoid overexposure to company idiosyncratic risks. The results show that before the Sarbanes Oxley Act of 2002 (SOX), companies of overconfident CEOs were more likely than other CEOs to engage in managing earnings through accelerating the timing of cash flow from operations and achieving analyst forecast benchmarks. After SOX, we find that overconfident CEOs are more likely to have income‐increasing discretionary accruals. They remain more likely to engage in real activities management through abnormally high cash flows, and also have abnormally low discretionary expenses. These results are consistent with overconfident CEOs feeling less constrained by SOX, and suggest that this individual characteristic works against regulators’ attempts to constrain earnings management by corporate executives. In contrast, we find that the tendency of overconfident CEOs to manage to targets decreases after SOX, perhaps due to changes in investor behavior in the new regulatory environment.     

Hiring retirement-age CEOs

More than 10% of the S&P 1500 companies have hired a CEO who starts the job near or above the conventional retirement age of 65 years old. This phenomenon exists among all industries and persists over time. Firms are more likely to hire retiring CEOs when the CEO job risk is high and when the firm is in distress. Retiring CEOs receive lower total compensation, the compensation structure puts a higher weight on nonequity-based compensation, and have a shorter tenure. Retiring CEOs can be beneficial to shareholders when they are hired for the right purpose.     

Credit Default Swaps and Managers’ Voluntary Disclosure

We investigate how the availability of traded credit default swaps (CDSs) affects the referenced firms’ voluntary disclosure choices. CDSs enable lenders to hedge their credit risk exposure, weakening their incentives to monitor borrowers. We predict that reduced lender monitoring in turn leads shareholders to intensify their monitoring and demand increased voluntary disclosure from managers. Consistent with this expectation, we find that managers are more likely to issue earnings forecasts and forecast more frequently when traded CDSs reference their firms. We further find a stronger impact of CDS availability on firm disclosure when (1) lenders have higher ability and propensity to hedge credit risk using CDSs, and (2) lender monitoring incentives and monitoring strength are weaker. Consistent with an increase in shareholder demand for public information disclosure induced by a reduction in lender monitoring, we find a stronger effect of CDSs on voluntary disclosure for firms with higher institutional ownership and stronger corporate governance. Overall, our findings suggest that firms with traded CDS contracts enhance their voluntary disclosure to offset the effect of reduced monitoring by CDS‐protected lenders.     

Are more able managers good future tellers? Learning from Japan

Baik et al. (2011) find that high-ability managers in the U.S. are more likely to issue accurate management earnings forecasts. Focusing on Japan, where management earnings forecasts are effectively mandated, we extend the literature by exploring (1) whether the relationship between managerial ability and forecast accuracy is unique to the U.S. disclosure system, where management forecasts are voluntary, and (2) how high-ability managers increase their forecast accuracy. We find that managerial ability is negatively associated with forecast errors based on initial forecasts, suggesting that high-ability managers are more likely to issue accurate forecasts at the beginning of the fiscal year. We then show that high-ability managers are less likely to revise their initial earnings forecasts and less likely to use earnings management to improve the accuracy of their earnings forecasts. Our findings show that, while high-ability managers are more likely to issue accurate initial management forecasts, low-ability managers are more likely to revise their forecasts and conduct earnings management to reduce their forecast errors.     

The Credibility of Earnings Forecasts in IPO Prospectuses and Underpricing

This paper provides empirical evidence of the impact of the voluntary disclosure of management earnings forecasts in IPO prospectuses and of the credibility of these forecasts, as perceived by investors at the time of the IPO. We measure forecast credibility ex ante with two approaches: (i) a vector of determinants of credibility that are observable by market participants at the time of the issue and (ii) the predicted value of the forecast error based on some of these determinants. Controlling for the firm's decision on whether or not to issue a forecast, we find that the issue of a forecast reduces underpricing. We find that the quality of the firm's governance and of the auditor and underwriter associated with the issue seems to act as a substitute to the disclosure of an earnings forecast in the prospectus, so that they significantly decrease the level of underpricing only for non‐forecasters. However, despite our various approaches to measure ex ante credibility, we find no association between the pricing of the issue and perceived forecast credibility at the time of the IPO.     

Why Do Managers Explain Their Earnings Forecasts?

Managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm. These attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings. We investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts. Using a sample of 951 management earnings forecasts issued from 1993 to 1996, we find that attributions are more likely for larger firms, less likely for firms in regulated industries, less likely for forecasts issued over longer horizons, more likely for bad news forecasts, and more likely for forecasts that are maximum type. Furthermore, attributions are associated with greater absolute price reactions to management forecasts, more negative price reactions to management forecasts (forecast news held constant), and a greater price reaction per dollar of unexpected earnings. Our findings hold after control for the aforementioned determinants of attributions and after control for other firm‐ and forecast‐specific variables that are often associated with security prices.     

Cross-border regulatory enforcement and corporate voluntary disclosure

In this study, we find that foreign firms cross-listed in the US issue significantly more and better-quality management earnings forecasts after their home countries sign the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU), a nonbinding arrangement established by the International Organization of Securities Commissions to enhance the cross-border enforcement of securities laws. Specifically, we find that after the MMoU, relative to their domestic counterparts in the US, foreign firms cross-listed in the US are not only more likely to issue management earnings forecasts but also issue them more frequently. They also tend to issue better-quality earnings forecasts, as measured by lower surprise, higher precision, greater timeliness, more disaggregation, lower optimism and fewer errors. We find that the observed effects of the MMoU signing are stronger for cross-listed firms from countries with weaker institutional environments, resulting in greater enforcement concerns after the MMoU, and for firms with less foreign institutional ownership before the MMoU. Collectively, our findings support the conjecture that after a US-listed foreign firm's home country enters the MMoU, the firm has more incentives to engage in voluntary disclosure due to greater concerns about regulatory enforcement and increased information demand from investors.     

Flu Fallout: Information Production Constraints and Corporate Disclosure

Using influenza epidemic data, we examine how constraints on corporate information production affect disclosure policies. We find that firms in areas with higher flu activity are less likely to issue short-run earnings forecasts and more likely to issue long-run earnings forecasts. These results are more pronounced when the information production process is more complex, when managers face a greater reputational loss for issuing low-quality short-run forecasts, and when firms’ costs of switching the forecast horizon are lower. Further analysis implies that the effect of flu activity on these forecast issuance decisions is not driven by firm performance or information uncertainty. Our results suggest that managers do not simply avoid issuing forecasts in response to information production constraints. Instead, they shift the forecast horizon from short-run to long-run, appearing to balance the costs of issuing low-quality forecasts with those of not issuing forecasts at all.