“The Role of Risk Tolerance in Managers’ Forecasting Decisions” by Dr. Holly YANG
Dr. Holly YANG
School of Accountancy
Singapore Management University
This paper examines whether managers with more convex equity incentives are more likely to provide voluntary disclosures. We argue that voluntary disclosures of forward-looking information can be risky for managers, but compensation contracts that increase their tolerance for risk limit their potential downside risks from doing so. Using management earnings forecasts as a proxy for voluntary disclosure and the CEO's portfolio vega to measure the convexity of managers' equity incentives, we find a significantly positive association between managers' vega and the issuance and frequency of forecasts. Results from the cross-sectional tests also indicate that this association is weaker for CEOs who consider disclosure as less risky (i.e., overconfident and long-tenured CEOs). Managers are also more likely to be concerned about the response to forecasts when earnings are more unpredictable and when myopic investors are likely to trade based on these disclosures (i.e., high sales volatility and high transient institutional investor base). Overall, our study suggests that vega increases managers’ tendency to provide voluntary disclosures, which helps improve incentive alignment between managers and shareholders.