The Role of Executive Risk-Taking Incentives in Voluntary Disclosure Accuracy

We investigate whether common compensation features encourage managers to reveal their private information. Assuming managers have private knowledge of future earnings, we use management forecast accuracy to proxy for the extent to which managers reveal private information and offer two main findings. First, both the amount of a manager's severance pay and the convexity of their stock option portfolio (i.e., vega) are positively associated with forecast accuracy. This suggests managers are more forthcoming if compensated in ways that reduce concerns over firm volatility. Second, these incentives are more strongly associated with forecast accuracy when short-term pressure to conceal private information is higher. Additional analyses suggest these results are unlikely explained by earnings management subsequent to the forecast, managers with these incentives issue less optimistically biased forecasts, and these contracts increase forecast accuracy of good and bad news. Overall, our results suggest compensation can encourage managers to provide more accurate disclosures.