Impact of Adoption of Long-Term Performance Plans on Financial Analysts' Long-Term Forecasts

Authors: Vogel T.J.¹; Lobo G.J.²

Source: Review of Quantitative Finance and Accounting, Volume 19, Number 3, November 2002 , pp. 291-306(16)

Publisher: Springer

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Abstract:

Prior research demonstrates that firms adopting long-term performance plans experience increased capital investment, earnings, and risk in the post-adoption period. However, these results are subject to distortions that may result from exogenous factors over the long time period examined. To avoid these potential distortions we examine financial analysts' forecasts in the periods immediately preceding and following the adoption of the performance plan. We find that projected long-term capital expenditures per share, earnings per share and cash flow per share are revised upward in the post-adoption period. These results are consistent with the premise that the adoption of long-term performance plans is expected to favorably affect managers' decisions. In addition, we find that the revisions are primarily attributable to firms that were performing poorly in the period prior to plan adoption and in greatest need of change. This finding has not been documented in previous studies.

Keywords: executive compensation; performance plans; capital expenditures

Language: English

Document Type: Research article

Affiliations: 1: Associate Professor of Accounting and Finance, Western New England College, 1215 Wilbraham Road, Springfield, MA 01119-2684 Tel.: (413) 782-1501, Fax: (413) 796-2068 tvogel@wnec.edu 2: George E. Bennett Professor of Accounting, Syracuse University, School of Management, Syracuse, NY 13244-2130 Tel.: (315) 443-3583, Fax: (315) 443-5457 gjlobo@som.syr.edu

Publication date: 2002-11-01