Managerial Incentive Horizons and the Quality of Firms ’ Information Environments

We examine empirically the relation between managerial incentive horizons and several measures of the quality of firms ’ information environments. When a firm’s managerial incentive horizon is short, it is more likely to report income-increasing discretionary accruals and to “walk down ” analysts ’ earnings forecasts; analyst forecast dispersion and absolute forecast errors are greater; and share turnover is greater. These results are consistent with recent theoretical models in which short incentive horizons induce managers to adopt strategies that reduce the quality of their firms ’ information environments and exacerbate information heterogeneity across investors. We also find evidence suggesting that investors at least partly understand these managerial incentives because they attach less credibility to the information in earnings surprises by short-horizon firms