Option compensation and optimism bias in management earnings forecasts
Abstract
We examine the link between the managers' option compensation and the optimism bias in management earnings forecasts. More particularly, we are interested in investigating the extent of self-serving optimism in the earnings forecasts made by managers with a high amount of option compensation. We hypothesize that managements' optimism (optimism bias in their earnings forecasts) increases with an increase in their stock option compensation. We provide evidence that managers issue optimistic forecasts since their compensation is a function of the stock price, and optimistic earnings forecasts usually result in a higher share price.
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Copyright (c) 2019 Yu-Ho Chi, David A Ziebart, Terry Campbell
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