Uncertainty in Managers’ Reporting Objectives and Investors’ Response to Earnings Reports: Evidence from the 2006 Executive Compensation Disclosures
59 Pages Posted: 19 Jan 2017 Last revised: 4 Oct 2018
Date Written: June 12, 2018
We examine whether the information content of the earnings report, as captured by the earnings response coefficient (ERC), increases when investors’ uncertainty about the manager’s reporting objectives decreases, as predicted in Fischer and Verrecchia (2000). We use the 2006 mandatory compensation disclosures as an instrument to capture a decrease in investors’ uncertainty about managers’ incentives and reporting objectives. Employing a difference-in-differences design and exploiting the staggered adoption of the new rules, we find a statistically and economically significant increase in ERC for treated firms relative to control firms, largely driven by profit firms. Cross-sectional tests suggest that the effect is more pronounced in subsets of firms most affected by the new rules. Our findings represent the first empirical evidence of a role of compensation disclosures in enhancing the information content of financial reports.
Keywords: Earnings response coefficient (ERC), compensation disclosures, SEC rules
JEL Classification: G38, G30, G34, M41, M48
Suggested Citation: Suggested Citation