Review of Quantitative Finance and Accounting, 19: 291–306, 2002
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Impact of Adoption of Long-Term Performance Plans
on Financial Analysts’ Long-Term Forecasts
THOMAS J. VOGEL
Associate Professor of Accounting and Finance, Western New England College, 1215 Wilbraham Road,
Springﬁeld, MA 01119-2684 Tel.: (413) 782-1501, Fax: (413) 796-2068
GERALD J. LOBO
George E. Bennett Professor of Accounting, Syracuse University, School of Management, Syracuse,
NY 13244-2130 Tel.: (315) 443-3583, Fax: (315) 443-5457
Abstract. Prior research demonstrates that ﬁrms adopting long-term performance plans experience increased
capital investment, earnings, and risk in the post-adoption period. However, these results are subject to distortions
that may result from exogenous factors over the long time period examined. To avoid these potential distor-
tions we examine ﬁnancial analysts’ forecasts in the periods immediately preceding and following the adoption
of the performance plan. We ﬁnd that projected long-term capital expenditures per share, earnings per share
and cash ﬂow per share are revised upward in the post-adoption period. These results are consistent with the
premise that the adoption of long-term performance plans is expected to favorably affect managers’ decisions.
In addition, we ﬁnd that the revisions are primarily attributable to ﬁrms that were performing poorly in the
period prior to plan adoption and in greatest need of change. This ﬁnding has not been documented in previous
Key words: executive compensation, performance plans, capital expenditures
JEL Classiﬁcation: M52, G31
When executive compensation is not based on the long-term performance of the ﬁrm,
managers may have incentives to make decisions that are detrimental to shareholder wealth.
Agency theory (for example, see Jensen and Meckling, 1976) suggests that risk-averse
managers, whose salaries and bonuses are linked to short-term performance measures, may
be reluctant to invest in positive net present value projects that are expected to increase
managers’ risk and/or to adversely affect short-term performance. Consistent with prior
studies, we refer to this as the “underinvestment” problem.
In an attempt to alleviate some of the agency costs associated with underinvestment,
many companies have adopted long-term performance contracts for their top executives.
In addition to an annual salary and bonus, these agreements are usually characterized by
a payoff to managers that is related to some measure of long-term ﬁrm performance. The
adoption of long-term performance plans better aligns the interests of managers with those