Earnings Forecast and Expectation Management in Compensation Contract:Empirical Research Based on Chinese Listed Companies
Traditional research on management performance forecast holds that management performance forecast is an important exter-nal information disclosure mechanism of listed companies,which helps alleviate the information asymmetry between external inves-tors and companies,and has an important impact on investor behav-ior and stock price.However,because shareholders are naturally at an information disadvantage relative to management,management's performance forecast may also become a complementary source of information for internal decision-making.Therefore,management's performance forecast may have the attribute of internal and external"dual information."So,how does the management take into account the needs of external investors and internal decision-making when issuing the earnings forecast?In particular,when the internal deci-sion-making involves the vital interests of the management,will the management distort the performance forecast out of self-interest,thus sacrificing the role of the performance forecast in external in-formation communication?The compensation contract is one of the internal decisions that the management pays the most attention to and is directly related to the personal interests of the management.In practice,compensation contracts often contain a performance target.This paper selects the performance forecast released before the firm sets the performance target of annual compensation con-tract as the research object,and explores whether the management will distort the external performance forecast for the sake of person-al compensation,and the consequences of this behavior in the firm's internal decision-making and external capital market.It is common for management to be assessed for performance and paid based on achievement of targets.The research finds that the management will achieve or beat the performance target in two ab-normal ways out of self-interest motivation:one is ex-post earnings management,and the other is ex-ante expectation management,that is,it influences the target itself by influencing the expectations of the target maker.The existing literature mainly focuses on the dis-cussion of ex post earnings management by management.However,with increasingly strict regulatory requirements and earnings man-agement easily leading to performance reversal,the management pays more attention to achieving performance targets through ex-pectations management.The board of directors usually puts forward performance appraisal targets at the end of the previous appraisal year or the beginning of the current appraisal year with reference to the annual operating conditions as the basis for appraisal.It is very common to refer to the performance of the previous year in this process.Since the annual report has not been completed at this time,the performance forecast issued by the company before this may become an important reference for setting performance targets.Given that management has an information advantage over outside directors and shareholders,and has greater flexibility in the form,accuracy and optimism of performance forecast,it may use per-formance forecast to conduct expectation management.At present,few studies have focused on the expected management behavior for performance appraisal targets,and few studies have studied the management performance forecast from the perspective of internal and external"dual information."Using the data of Chinese A-share listed companies from 2004 to 2020,this paper analyzes the management expectation behavior through performance forecast from the perspective of internal and external"dual information."We find that compared with other times,the performance forecast made by the management before the performance target is determined is more pessimistic,and this pes-simistic tendency is closely related to the selection of performance target and management power.Specifically,we find that when the pay-net profit sensitivity is higher,the managers'perk is higher,or the shareholding ratio is higher,the performance forecast made by the management in January is more pessimistic.Furthermore,this paper finds that effective governance mechanisms,such as the separation of the two positions,the reduction of managerial share-holding and analyst following,can have a certain inhibitory effect on the expected management behavior of the managers.Finally,we also find that the pessimistic degree of performance forecast is positively correlated with the monetary compensation received by the management in the next year,which indicates that the board of directors may not fully recognize the expected management behav-ior of the management,that is,to reduce the performance target in the compensation contract by issuing more pessimistic performance forecast.The main contributions of this paper are as follows.First,the analysis of management performance forecast in the ex-isting literature is mainly based on the capital market and external investors,and the internal and external"dual information"attribute of performance forecast has not been fully paid attention to.This paper finds that managers will actively use mandatory performance forecast to intervene in the establishment of performance appraisal targets,and through such behavior,they will get higher compen-sation rewards,which reveals the role of performance forecast for external capital market in the internal decision-making of the com-pany.Second,in view of the existence of the attribute of"dual informa-tion",the characteristics of performance forecast are often affected by both internal and external motivations,and the influences of the two aspects are dynamic and may not be completely consistent.Previous studies mainly studied management performance forecast from external motivations such as legal risk and investor relations.This paper takes the management's self-interest motivation in the formulation of compensation contract as the breakthrough point,and enriches the existing research on the management's perfor-mance prediction motivation.Third,from the perspective of the effectiveness of compensation contract design,management compensation contract has always been considered as an important mechanism to reduce agency costs and encourage the management to create value for shareholders.However,"management power theory"believes that the manage-ment has a strong ability to influence the compensation contract to maximize personal interests,which leads to the greatly reduced incentive effect of compensation contract.The results of this paper provide evidence for this theory,and also respond to the ongoing debate on higher and higher management compensation.Finally,the research results of this paper also have certain practical significance,our findings show that in the formulation of compen-sation contract,the board of directors does not fully identify the opportunistic behavior of the management in the performance fore-cast to a certain extent,and diversified performance indicators can directly inhibit the expectation management,which also provides a reference for the company to improve the design of compensation contract.
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