The effect of CEO ownership on the information content of reported earnings |
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Authors: | Aloke Ghosh Doocheol Moon |
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Institution: | (1) Baruch College, City University of New York, New York, NY, USA;(2) School of Business, Yonsei University, 134 Shinchon-dong, Seodaemoon-gu, Seoul, 120-749, Korea;; |
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Abstract: | This paper examines the relation between capital market perceptions of earnings quality and CEO equity ownership. Using the
earnings response coefficients (ERCs) from annual returns–earnings regressions as a proxy for investor perceptions of earnings
quality, we find that ERCs first increase and then decline across higher levels of CEO ownership with an inflection point
around 25% ownership. Using analyst behavior as another proxy for the perceptions of financial analysts, we find that earnings
forecasts are more accurate as ownership increases, but once ownership levels reach about 25%, accuracy declines with further
increases in ownership. Forecast dispersion, forecast revision volatility, and analyst following decline and then increase
across increasing levels of CEO ownership. Our results suggest that, for low levels of CEO ownership, earnings are perceived
as being more informative about future firm performance as ownership increases. However, once ownership levels are high, earnings
are perceived as being less informative with further increases in ownership. |
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