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Review of Accounting Studies

Erschienen in:

14.04.2018

Shifting corporate culture: executive stock ownership plan adoptions and incentives to meet or just beat analysts’ expectations

verfasst von: Phillip J. Quinn

Erschienen in: Review of Accounting Studies | Ausgabe 2/2018

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Abstract

This paper investigates whether adoptions of executive stock ownership plans coincide with decreased incentives to meet or just beat analysts’ near-term EPS forecasts. Firms often assert that ownership plans focus executives on long-term performance. I find that the impact of these adoptions on meeting or just beating analysts’ EPS forecasts differs depending on whether the plan binds the CEO to reach ownership targets by a specified date. In particular, I find that firms that adopt plans requiring an increase in CEO ownership exhibit a lower propensity to meet or just beat earnings forecasts following plan adoptions. In contrast, firms that adopt plans that require no increase exhibit no change in the propensity to meet or just beat. The results suggest that firms use binding ownership plans to shift executives’ focus from near-term earnings benchmarks to long-term value creation.

Vorheriger Artikel An information-based model for the differential treatment of gains and losses

Nächster Artikel The market reaction to bank regulatory reports

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Firms refer to executive ownership requirements by various names, including stock ownership plans, target ownership plans, management stock ownership guidelines, and executive stock ownership guidelines. Appendix 1 discusses ownership plans in detail and includes examples of plans from Omnicom and Compaq Computer.

A concern is that the adoption of stock ownership plans causes executives to engage in income-decreasing earnings management so that stock may be purchased at lower prices on the open market. Managers do not often buy shares to meet this requirement but instead tend to hold future share grants they otherwise might have sold. In later tests, I confirm that, when CEOs are required to increase their ownership, they exhibit a reduction in selling. Furthermore, I find no evidence of an increase in income-decreasing earnings management in the year prior to, the year of, or the year after the adoption of stock ownership plans (untabulated), which is inconsistent with managers depressing stock prices to buy shares.

Firms may use stock ownership plans to reach a commonly stated cultural goal of long-term value creation, but, in later tests, I find no evidence that firms that adopt ownership plans with a stated goal of long-term value creation reduce their propensity to meet or just beat the consensus analyst forecast. This inconsistency between firms’ stated values and their practices is consistent with the results of Loughran et al. (2009), who find that firms with the greatest stated emphasis on ethics are more likely to be “sin” stocks, more likely to be defendants in class action lawsuits, and more likely to exhibit poor corporate governance scores.

Survey evidence suggests that CEOs exert the greatest influence over corporate culture (Graham et al. 2017). In Section 5, I examine whether the cultural shift I document is consistent with fixed, idiosyncratic CEO styles or with the board and the CEO jointly determining corporate culture (Fee et al. 2013).

I define all variables in Appendix 2.

Krishnan et al. (2011) find that social ties significantly increase firms’ propensities to manage earnings to meet or just beat consensus analyst EPS forecasts, and the authors report in Table 3 that the relation disappears after The Sarbanes–Oxley Act of 2002 (SOX). Thus, insofar as social ties drive the results, the results should not hold in the post-SOX period. I delete all observations before SOX, and my inferences are unchanged (untabulated).

Consistent with the work of Hanlon et al. (2003) and Cassell et al. (2013), I set missing governance values equal to zero but include a separate indicator variable (GOV MISSING) equal to one when the governance variable is unavailable.

See Hainmueller (2012) for details on the weighting procedure.

An alternative dependent variable is the interaction of meet or just beat and an indicator variable equal to one when the CEO sold shares in the subsequent quarter and zero otherwise. Inferences are qualitatively similar when using this alternative dependent variable (untabulated).

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Titel: Shifting corporate culture: executive stock ownership plan adoptions and incentives to meet or just beat analysts’ expectations
verfasst von: Phillip J. Quinn
Publikationsdatum: 14.04.2018
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 2/2018
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-018-9442-6

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