Tests for relative performance evaluation based on assumptions derived from proxy statement disclosures

Tests for relative performance evaluation based on assumptions derived from proxy statement... The main purpose of this paper is to test for relative performance evaluation (RPE) using assumptions derived from an examination of firms’ disclosures about their RPE use. Prior empirical evidence supporting the use of RPE in executive compensation is mixed. This is puzzling since studies of firm disclosures indicate that firms claim to use RPE based on both accounting measures and stock returns. Those few studies that do find empirical support observe it with either an accounting performance measure or stock returns, but not both. The lack of strong consistent empirical support for RPE is due, in part, to the fact that the preponderance of tests for RPE incorporate unsubstantiated assumptions about the way firms apply RPE. This includes the compensation measure to which RPE is applied and the way in which firms use firm-own and peer group performance when determining compensation. Our test results provide support for the use of RPE among 1998 S&P 500 firms with both stock returns and return on equity. To our knowledge, this is the first study to find support for RPE with both stock returns and an accounting performance measure. Through a series of sensitivity analyses, we also provide insight into the amount of detail researchers need to build into their empirical tests in order to find support for RPE. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Tests for relative performance evaluation based on assumptions derived from proxy statement disclosures

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Publisher
Springer Journals
Copyright
Copyright © 2010 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-010-0198-8
Publisher site
See Article on Publisher Site

Abstract

The main purpose of this paper is to test for relative performance evaluation (RPE) using assumptions derived from an examination of firms’ disclosures about their RPE use. Prior empirical evidence supporting the use of RPE in executive compensation is mixed. This is puzzling since studies of firm disclosures indicate that firms claim to use RPE based on both accounting measures and stock returns. Those few studies that do find empirical support observe it with either an accounting performance measure or stock returns, but not both. The lack of strong consistent empirical support for RPE is due, in part, to the fact that the preponderance of tests for RPE incorporate unsubstantiated assumptions about the way firms apply RPE. This includes the compensation measure to which RPE is applied and the way in which firms use firm-own and peer group performance when determining compensation. Our test results provide support for the use of RPE among 1998 S&P 500 firms with both stock returns and return on equity. To our knowledge, this is the first study to find support for RPE with both stock returns and an accounting performance measure. Through a series of sensitivity analyses, we also provide insight into the amount of detail researchers need to build into their empirical tests in order to find support for RPE.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Aug 28, 2010

References

  • Changes in CEO compensation structure and the impact on firm performance following CEO turnover
    Blackwell, DW; Dudney, DM; Farrell, KA
  • Discretion in financial reporting: the voluntary disclosure of compensation peer groups in proxy statement performance graphs
    Byrd, JW; Johnson, MF; Porter, SL
  • Do executive stock option grants have value implications for firm performance?
    Lam, S; Chng, B
  • An empirical study on issues in Taiwanese employee reward plans
    Lin, W; Ko, P; Chien, HF; Lee, W

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