The Interdependence Effect of CEO and Outside Director Equity-Based Compensation on Management Earnings Forecasts: Substitutes or Complements?

This study examines whether equity-based compensation of chief executive officer (CEO) and that of outside directors are interdependent in affecting management earnings forecasts (MFs). Our evidence reveals that CEO (director) equity-based compensation is positively associated with the likelihood and frequency of MF disclosures and the accuracy of MFs when director (CEO) equity-based compensation is not highly used. However, an increase in director (CEO) equity-based compensation is not effective in promoting the disclosure frequency and accuracy when the level of CEO (director) equity-based compensation is already high. These results suggest that in the context of MF disclosure the two equity incentive mechanisms do not act as complements but as substitutes when both mechanisms are intensively used. Overall, our evidence suggests that both CEO and director equity-based compensation affects the quantity and quality of firms' voluntary information disclosure but their effects are interdependent.