CEO compensation convexity and meeting‐or‐just‐beat earnings forecast

Abstract

A line of research documents that corporate executives' compensation convexity relates to earnings management, the issuance of management earnings forecasts and firms' investing and financing decisions. Another stream of research demonstrates that executives manage earnings expectations downward to beatable levels. We bridge these lines of research by investigating how CEO compensation convexity affects expectation management, an important earnings reporting strategy. We hypothesise and find that compensation convexity plays an important role in inducing CEOs to adopt a meet‐or‐just‐beat earnings reporting strategy, which is implemented by downward expectation management.