Earnings Warnings and CEO Welfare

Ping Wang; Masako Darrough; Linna Shi

doi:10.1111/jbfa.12213

Is Openness Penalized? Stock Returns around Earnings Warnings

The Accounting Review ◽

10.2308/accr.2007.82.4.1055 ◽

2007 ◽

Vol 82 (4) ◽

pp. 1055-1087 ◽

Cited By ~ 62

Author(s):

Jennifer W. Tucker

Keyword(s):

Stock Returns ◽

Selection Bias ◽

Selection Model ◽

Bad News ◽

Short Term ◽

Heckman Selection Model ◽

Earnings Announcement ◽

Self Selection ◽

Earnings Warnings ◽

Heckman Selection

Prior research finds that firms warning investors of an earnings shortfall experience lower returns than non-warning firms with similar risks and earnings news. Openness thus appears to be penalized by investors. Yet, this finding may be due to a self-selection bias that occurs when firms with a larger amount of unfavorable non-earnings news (“other bad news”) are more likely to warn. In this paper I use a Heckman selection model to infer the amount of other bad news and document that, on average, warning firms have a larger amount of other bad news than non-warning firms. After controlling for this effect, I find that warning firms' returns remain lower than those of non-warning firms in a short-term window ending five days after earnings announcement. When this window is extended by three months, however, warning and non-warning firms exhibit similar returns. My evidence suggests that openness is ultimately not penalized by investors.

Download Full-text

Shareholder Litigation Risk and Managers’ Private Disclosure of Earnings Warnings

SSRN Electronic Journal ◽

10.2139/ssrn.3983504 ◽

2021 ◽

Author(s):

Sandra G. Schafhäutle

Keyword(s):

Litigation Risk ◽

Shareholder Litigation ◽

Private Disclosure ◽

Earnings Warnings

Download Full-text

Long-Term Bias

Columbia Business Law Review ◽

10.52214/cblr.v2020i1.7158 ◽

2020 ◽

Vol 2020 (1) ◽

Author(s):

Michal Barzuza ◽

Eric Talley

Keyword(s):

Case Studies ◽

Behavioral Finance ◽

Hedge Funds ◽

Wall Street ◽

Corporate Managers ◽

Market Participants ◽

Folk Wisdom ◽

Earnings Warnings ◽

Short Termism

An emerging consensus in certain legal, business, and scholarly communities maintains that corporate managers are pressured unduly into chasing short-term gains at the expense of superior long-term prospects. The forces inducing manage- rial myopia are easy to spot, typically embodied by activist hedge funds and Wall Street gadflies with outsized appetites for current quarterly earnings. Warnings about the dangers of “short termism” have become so well established, in fact, that they are now driving changes to mainstream practice as courts, regulators and practitioners fashion legal and transactional constraints designed to insulate firms and managers from the influence of investor short-termism. This Article draws on ac- ademic research and a series of case studies to advance the the- sis that the emergent folk wisdom about short-termism is in- complete. A growing literature in behavioral finance and psychology now provides sound reasons to conclude that corpo- rate managers often fall prey to long-term bias—excessive op- timism about their own long-term projects. We illustrate sev- eral plausible instantiations of such biases using case studies from three prominent companies where managers have argua- bly succumbed to a form of “long-termism” in their own corpo- rate stewardship. Unchecked, long-termism can impose sub- stantial costs on investors that are every bit as damaging as short-termism. Moreover, we argue that long-term managerial bias sheds considerable light on the paradox of why short- termism evidently persists among supposedly sophisticated fi- nancial market participants: shareholder activism—even if unambiguously myopic—can provide a symbiotic counter-bal- last against managerial long-termism. Without a more defini- tive understanding of the interaction between short- and long- term biases, then, policymakers should be cautious about em- bracing reforms that focus solely on half of the problem.

Download Full-text

Within-Industry Timing of Earnings Warnings: Do Managers Herd?

SSRN Electronic Journal ◽

10.2139/ssrn.793547 ◽

2009 ◽

Cited By ~ 2

Author(s):

Senyo Y. Tse ◽

Jenny Wu Tucker

Keyword(s):

Earnings Warnings

Download Full-text

Do Peer Warnings Affect CEO Compensation?

Accounting Horizons ◽

10.2308/acch-51836 ◽

2017 ◽

Vol 31 (4) ◽

pp. 71-91 ◽

Cited By ~ 1

Author(s):

Masako N. Darrough ◽

Linna Shi ◽

Ping Wang

Keyword(s):

Stock Prices ◽

Ceo Compensation ◽

Future Earnings ◽

Performance Sensitivity ◽

Management Guidance ◽

Changing Patterns ◽

Earnings Warnings ◽

Annual Earnings ◽

Negative Factors ◽

Option Compensation

SYNOPSIS In this study, focusing on the period 1996–2010, we conduct an empirical investigation of how warnings by industry peer firms about future earnings affect CEO compensation structure. These warnings contain information about the industry, signaling dim industry prospects and possibly triggering negative spillovers on stock prices. We predict that firms respond to industry-wide negative information by changing the compensation mix to make it more future oriented and by reducing pay-performance sensitivity to shield CEOs from negative factors beyond their control. We find that (1) for firms that issue warnings, peer warnings are associated with a reduction in pay-performance sensitivity; and (2) for firms that do not issue warnings, peer warnings are associated with a modification in compensation mix, such that it becomes more equity based and future oriented, similar to the adjustment made to CEO compensation in the wake of self-warnings. Our results are robust to different definitions of warnings and to the exclusion of annual earnings warnings. However, the results do not hold after 2005, which may be due to factors such as a decline in the use of option compensation, a decrease in the issuance of warnings outside of the announcement window, and changing patterns in management guidance behavior.

Download Full-text