Economic Consequences of Equity Compensation Disclosure

The primary role of equity compensation is to provide incentives to an effort-averse agent. Here, we show that the chosen level of equity incentives, when publicly disclosed, will also convey information about future earnings, causing two-way linkages between incentive compensation and financial reporting. If either (a) market prices respond more (less) to information, (b) the manager is more (less) risk-averse, (c) earnings are more (less) noisy, then the firm