Does Managerial Commitment Signal Management Quality?

Mattias Hamberg (Mattias.Hamberg@nhh.no),

Joost Impink (joost@ufl.edu)

Motivation

Resolving uncertainty through voluntary disclosures

Effect of managerial commitment? We examine relation corporate

performance targets with: Current performance Future performance

Hypotheses

H1: Target disclosure signals higher performance

H2: Disclosing and meeting targets signals higher performance

Forecasts/Guidance versus Targets Forecast/guidance:

‘Expect’ Changing forecast/guidance implicitly

allowed Common in US (high litigation environment)

Target: Goal/commit/target Changing target (implicitly) not allowed Common in several European countries (low

litigation environment)

Theory

Goal commitment: the unwillingness to lower or abandon a target (Campion and Lord, 1982)

Management quality: “…includes an ability to deliver promises” (Holland and Doran, 1998)

Management commitment provides incentives for workers to undertake strategy-specific investments (Ferreira and Rezende, 2007)

Dataset, Measuring Financial Targets Sample: 2,041 Swedish listed firms

over 2001-2010 Measuring target disclosure

Based on the annual report Future performance, expressed as ‘goal,

commit, target’

Financial Targets Disclosure

Firms with financial targets in their 2009 annual report Sweden (20 OMX30 firms): 70% The Netherlands (20 AEX firms): 65% France (CAC 40 firms): 30% U.S. (26 Dow Jones firms): 8%

Timeline

Target issued forfiscal year t

Realization known fortargets fiscal year t

Method

Test H1 (target disclosure signals higher performance)

Test H2 (meeting targets signals higher performance)

H1: No support; consistent with low quality firms mimicking high quality firms

H2: Support; high quality firms disclose and meet their targets

Limitations

No forecasts/guidance data to make direct comparison between guidance vs targets

Self-selection difficult to control for