The Effect of Adoption of Long-Term Performance Plans on Stock Prices and Accounting Numbers

Abstract

Long-term performance plans are theoretically adopted to better align the interests of the managers and stockholders by redirecting managerial decision-making toward the longterm performance of the corporation. This study reports significant positive excess returns around the announcement of performance plan adoption, which is consistent with the view that such plans would reduce the agency problem. In addition, this study finds an association between the adoption of long-term performance plans and subsequent growth in profitability, suggesting that long-term performance plans may have been successful in motivating an enhancement in the accounting measures of profitability used to reward managers under the plan. Finally, the excess returns around the announcement of performance plan adoption are found to be positively correlated with subsequent change in growth of earnings per share, the most commonly used accounting performance measure.