Analysts Forecasts: The Secret Sauce Stirring Up CEOs’ Abnormal Pay

Xia Li; Jairaj Gupta; André Aroldo Freitas De Moura

doi:10.1007/s11156-025-01472-8

Analysts Forecasts: The Secret Sauce Stirring Up CEOs’ Abnormal Pay

Xia Li
, Jairaj Gupta
, André Aroldo Freitas De Moura

University of York, YO10 5ZF, UK
FGV EAESP

Research output: Contribution to journal › Article › peer-review

Abstract

Jensen and Meckling (1976) claim that by facilitating firms’ activity monitoring, security analysis by financial analysts can reduce agency costs between management and external capital providers, and thereby increase shareholder value. Additionally, boards are required to design executive pay structures to minimise agency problems and related costs. Among the limited studies that explore the relationship between analysts’ forecasts and CEOs’ compensation, one strand reports a positive relation supporting the agency theory, while the other reports a negative relation contradicting the agency theory. This disagreement may stem from the unobserved determinants of CEOs’ compensation structures. Thus, we use CEOs’ abnormal compensation (ACOMP, the proportion of pay that economic determinants cannot accurately determine) to reinvestigate this relation and find conclusive evidence of its negative association with analysts’ forecast metrics. Although consistent with agency theory, this negative relationship is mainly witnessed in firms subject to stronger external monitoring, as indicated by higher corporate governance scores, takeover vulnerability, institutional ownership, and firm-level political risk. Our findings suggest that analysts serve as a proxy for unobserved factors influencing ACOMP and play a key role in aligning CEO interests with those of shareholders.

Original language	English
Number of pages	27
Journal	Review of Quantitative Finance and Accounting
DOIs	https://doi.org/10.1007/s11156-025-01472-8
Publication status	Published - 28 Jan 2026

Bibliographical note

Copyright © The Author(s) 2026. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit https://creativecommons.org/licenses/by/4.0/.

Keywords

Executive compensation
Abnormal compensation
Earnings forecasts
information asymmetry
Agency theory; Corporate governance

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10.1007/s11156-025-01472-8Licence: CC BY 4.0

Analysts Forecasts -The Secret Sauce Stirring Up CEOs’ Abnormal Pay_VoR
Copyright © The Author(s) 2026. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit https://creativecommons.org/licenses/by/4.0/.
Final published version, 1.7 MBLicence: CC BY 4.0

Cite this

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abstract = "Jensen and Meckling (1976) claim that by facilitating firms{\textquoteright} activity monitoring, security analysis by financial analysts can reduce agency costs between management and external capital providers, and thereby increase shareholder value. Additionally, boards are required to design executive pay structures to minimise agency problems and related costs. Among the limited studies that explore the relationship between analysts{\textquoteright} forecasts and CEOs{\textquoteright} compensation, one strand reports a positive relation supporting the agency theory, while the other reports a negative relation contradicting the agency theory. This disagreement may stem from the unobserved determinants of CEOs{\textquoteright} compensation structures. Thus, we use CEOs{\textquoteright} abnormal compensation (ACOMP, the proportion of pay that economic determinants cannot accurately determine) to reinvestigate this relation and find conclusive evidence of its negative association with analysts{\textquoteright} forecast metrics. Although consistent with agency theory, this negative relationship is mainly witnessed in firms subject to stronger external monitoring, as indicated by higher corporate governance scores, takeover vulnerability, institutional ownership, and firm-level political risk. Our findings suggest that analysts serve as a proxy for unobserved factors influencing ACOMP and play a key role in aligning CEO interests with those of shareholders. ",

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N2 - Jensen and Meckling (1976) claim that by facilitating firms’ activity monitoring, security analysis by financial analysts can reduce agency costs between management and external capital providers, and thereby increase shareholder value. Additionally, boards are required to design executive pay structures to minimise agency problems and related costs. Among the limited studies that explore the relationship between analysts’ forecasts and CEOs’ compensation, one strand reports a positive relation supporting the agency theory, while the other reports a negative relation contradicting the agency theory. This disagreement may stem from the unobserved determinants of CEOs’ compensation structures. Thus, we use CEOs’ abnormal compensation (ACOMP, the proportion of pay that economic determinants cannot accurately determine) to reinvestigate this relation and find conclusive evidence of its negative association with analysts’ forecast metrics. Although consistent with agency theory, this negative relationship is mainly witnessed in firms subject to stronger external monitoring, as indicated by higher corporate governance scores, takeover vulnerability, institutional ownership, and firm-level political risk. Our findings suggest that analysts serve as a proxy for unobserved factors influencing ACOMP and play a key role in aligning CEO interests with those of shareholders.

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KW - information asymmetry

KW - Agency theory; Corporate governance

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Analysts Forecasts: The Secret Sauce Stirring Up CEOs’ Abnormal Pay

Abstract

Bibliographical note

Keywords

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