Equity Risk Incentives and Voluntary Disclosure
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This study examines whether equity risk incentives (i.e., vega) prompt managers to issue stock return volatility-increasing management earnings forecasts. First, I find that stock return volatility increases more (or decreases less) following a management earnings forecast as a firm’s CEO vega is higher. Further, firms issue volatility-increasing management earnings forecasts more frequently as their CEO vega is higher. Additional analyses, including a path analysis, reveal that firms with high CEO vega are more likely to issue sporadic, bad-news, range or open-ended, and short-horizon management earnings forecasts which indirectly increase stock volatility. Finally, I show that CEOs are more likely to sell their stock options following the issuance of stock volatility-increasing management earnings forecasts. Taken together, my findings suggest that although managers’ equity risk incentives drive them to issue more earnings forecasts, these forecasts are less likely to increase firm transparency but rather tend to increase stock return volatility.