The Time Horizon of Managerial Incentives and Firms' Information Environment Quality

Abstract

Managers whose equity-based incentives vest over a shorter time horizon appear to adopt strategies that reduce information environment quality and exacerbate information heterogeneity across investors. Firms with shorter-horizon managerial incentives are more likely to inflate reported earnings and deflate analysts’ earnings expectations. These firms also have greater analyst forecast dispersion, larger absolute forecast errors, and higher share turnover. Investors appear to at least partly understand incentive horizon issues because firms with shorter-horizon managerial incentives experience muted investor reaction to their earnings announcements and have statistically insignificant long-term abnormal stock returns. Overall, the results illustrate how the temporal structure of managerial incentives can influence managerial behavior and produce important capital market effects.