Why do firms disclose performance compensation targets?

Abstract

This paper analyzes the decision to disclose performance compensation targets that contain information about future profitability. I test the effect of factors expected to influence the decision to provide other expectation disclosures, e.g. management forecasts, as well as that of factors particular to the compensation setting. Results suggest that financial reporting concerns (as measured in Carter et al., 2007) along with pressure from the SEC influence performance target disclosure, and that the influence changes with the availability of management forecasts. I further test determinants of the level of performance target relative to a management forecast. I show institutional ownership is associated with higher performance targets relative to forecasts, while neither excess compensation, SEC pressure, nor financial reporting incentives appear to influence this difference.