The table presents the results of simultaneous probit regressions on stock price trends and managers’ efforts on compensation structures and managerial overconfidence for good news. The choices of stock price trends can be either Preignition or Inoculation, whose definitions vary with the type of information. Dummy variable Preignition (bad) is equal to 1 if the manager’s choice is Preignition for bad news. We measure Managers’
Effort by sales growth, as effort is a key determinant for growth. There are two groups of compensations: stock option awards (Stock_awards, Option_awards) and non-equity incentive compensations (Salary, Bonus, Noneq_incent). Overconfident is an indicator variable equal to 1 for all years after the CEO holds options that are at least 67% in the money. The Instrument variable for the regression on Preignition (bad) is a dummy variable whose value is 1 if there was bad news in the previous period and 0 for otherwise.
The instrument variable for the regression on Managers’ Efforts is the medium of industry growth, where industry is classified by the first two codes in SIC. Standard errors are corrected for clustering of observations at the firm level (t-statistics are in parentheses).
*, **, and *** measure significance at the 10%, 5%, and 1% level, respectively.
Simultaneous Probit Regressions ( Bad news, N=458 ) Dependent variable:
Preignition (bad)
Dependent variable:
Managers’ Efforts Coefficient
Estimate (p-value) Coefficient
Estimate (p-value)
Preignition (bad) 0.1426095 0.548
Managers’ Efforts 5.562675*** 0.000
Intercept 0.4900774 0.338 -0.1383305 0.501 Overconfident -0.2147159 0.111 0.0133182 0.710
Age 0.0050738 0.495 -0.0012443 0.375
Salary_t 0.8434910 0.345 -0.0114400 0.953 Bonus_t 0.2694601 0.464 0.0124358 0.203 Stock_awards_t 0.1847015 0.223 -0.0034653 0.922 Option_awards_t 0.3053548* 0.094 -0.0310497 0.392 Noneq_incent_t -1.5003420*** 0.000 0.1238176 0.225 Pension_chg_t -0.2649075 0.298 -0.0056502 0.907 Othcomp_t -0.2492698 0.171 0.0176695 0.361 Size_t -0.1291128 0.342 -0.0009663 0.977 Ln(Sales_t) 0.0483510 0.705 0.0095249 0.688 Ppeemp_t 0.0006039*** 0.004 -0.0000881** 0.022 Leverage_t 0.5359086*** 0.006 -0.0635737 0.128 Cashholding_t 0.0080060 0.732 0.0029312 0.577 Tobinq_t -0.1115713*** 0.000 0.0161700** 0.012
F. Simultaneous Regressions on Stock Price Trends and Managers’ Efforts
When management forecasts are announced, the managers need to precommit to the
deci-sions on stock price trend and effort level, as described by equation (3). Therefore, we estimate equations (&) and (&&) simultenously to see if our earlier results are robust to the interaction between stock price trend and managers’ efforts.
Table # and ## present the simultaneous regression results on managers’ decisions on stock price trend and effrots for good and bad news, respectively. Again, since the earnings are determined by the firms’ future perspect and managers’ effort levels, we use the growth in sales as a proxy for effort levels.
Pr () = 0+ 1 + 02+ 03+ (10)
0 = 0+1 +2 ()+03+04+ (11) Table # shows that, for good news, all our predictions on the choice of stock price trends hold in the simultaneous regressions. (1) The coefficients of option awards are significantly negative at 001 (-0.2776943) for the regressions on Preignition (good), suggesting that as the the proportion of stock option awards increases, managers are more likely to use innoculation (in this case, 4 0) as their dislcosure strategies. (2) The coefficients of Overconfident are significantly positive at 001 (0.420631) for the regressions on Preignition (good), suugesting that managers are more likely to use preignition when there is good news.
Table # also shows that, for good news, our predictions on the relation between managers efforts and managerial overconfidence also holds in the simultaneous regressions. However, the relation between managers efforts and the choice of stock price trend becomes vague in the simultaneous regressions. (1) The coefficients of Overconfident is significantly positive at
001 (0.050797) for the regressions on Managers’ Efforts, suggesting that managers’ effort levels will increase with managerial overconfidence. (2) The coefficient of Preignition (good) is positive but insignificant (0.0040664) for the regressions on Managers’ Efforts, suggesting that using preignition (in this case, 4 0) decreases the net benefit of 4 which cancels out the positive impacts from good news, hence the overall impact on remains unchanged.
Next, Table ## shows that, for bad news, all of our predictions on the choice of stock price
trends hold in the simultaneous regressions. (1) The coefficients of option awards are significantly positive at 01 (0.3053548) for the regressions on Preignition (bad), suggesting that as the the proportion of stock option awards increases, managers are more likely to use preignition (in this case, 4 0) when there is bad news. Also, when the proportion of non-equity incentive compensations increases, the coefficients of Noneq_incent is both significantly negative at 001 (i.e., -1.500342) for the regressions on Preignition (bad), suggesting that managers are more willing to use innoculation as the non-equity incentive compensations increases. (2) The coefficient of Overconfident is negative but insignificant (i.e., 0.0133182) for the regressions on Preignition (bad), suggesting that the two conflicting impacts on the implicit cost of performance bonus (i.e., bad news and overconfidence) cunteract with each other and cause the impact on the choice of stock price trends to be insignificant.
Finally, Table # also shows that, for bad news, neither of our predictions on the relation be-tween managers efforts and managerial overconfidence holds in the simultaneous regressions. (1) The coefficients of Overconfident is positive but insignitcant (i.e., 0.0133182) for the regressions on Managers’ Efforts. (2) The coefficient of Preignition (bad) is positive but insignificant (i.e., 0.01426095) for the regressions on Managers’ Efforts. When there is bad news, the managers’
perceived earnings will be lower than expectation and the net benefit of increasing is lower than expectation. But by using preignition (4 0 in this case), there is a impact on the net benefit of 4 Our results suggest that the two conflicting effects counteract with each other and hence there is no significant impact on managers’ effort.
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