Renegotiation and Relative Performance Evaluation: Why an Informative Signal May Be Useless

Renegotiation and Relative Performance Evaluation: Why an Informative Signal May Be Useless Although Holmström's informativeness criterionprovides a theoretical foundation for the controllability principleand interfirm relative performance evaluation, empirical and fieldstudies provide only weak evidence on such practices. This paperrefines the traditional informativeness criterion by abandoning theconventional full-commitment assumption. With the possibility ofrenegotiation, a signal's usefulness in incentive contractingdepends on its information quality, not simply on whether the signalis informative. This paper derives conditions for determining when asignal is useless and when it is useful. In particular, theseconditions will be met when the signal's information quality iseither sufficiently poor or sufficiently rich. (JEL C72,D82). Review of Accounting Studies Springer Journals

Renegotiation and Relative Performance Evaluation: Why an Informative Signal May Be Useless

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Kluwer Academic Publishers
Copyright © 2001 by Kluwer Academic Publishers
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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