Self-Serving Behavior in Managers' Discretionary Information Disclosure Decisions

Research has shown that managers display self-serving behavior with regard to a variety of discretionary information production decisions. We test here whether such behavior is also manifest in discretionary information disclosure decisions. Our particular focus is on the common stock return performance comparisons now required in corporate proxy statements under the SEC's new executive compensation disclosure regulations. We find evidence which suggests that the industry and peer company stock return benchmarks and the broader market indices chosen by management for those comparisons are downward biased resulting in a pervasive overstatement of the relative performances of the reporting firms. Cross-sectionally the extent of the bias varies systematically with certain key attributes of the reporting firm. Among these are the level of its own performance and the degree of stock ownership by the firm's senior management. We interpret our findings as indicative of self-serving behavior on the part of the firm's management