<i>Ex Ante</i> Disclosure of Long-Term Compensation Targets

ABSTRACT Firm policies for whether or when to disclose specific targets used in executive incentive plans vary significantly. Ex ante disclosure (made before performance is realized) arguably facilitates shareholder monitoring. However, the practice may reduce contracting flexibility by making it more difficult for boards to make payout adjustments ex post. Using hand-collected target disclosure dates, I examine whether disclosure timing varies with demand for compensation flexibility. Consistent with my hypothesis, I find that firms are less likely to disclose long-term targets ex ante when operating environments are uncertain, shareholder attention on compensation is stronger, and contract formulas are more detailed. I do not find evidence to suggest that firms avoid ex ante disclosure to facilitate rent extraction or mitigate proprietary costs from disclosing forward-looking information. Overall, my findings support arguments that flexibility can be an important tool in efficient contracting and suggest that disclosure discretion may help facilitate flexible contracts. JEL Classifications: D22; J33; M41; M52.