Download or read book Peer Firms in Relative Performance Evaluation written by Ana M. Albuquerque and published by . This book was released on 2009 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Relative performance evaluation (RPE) in CEO compensation provides insurance against external shocks and yields a more informative measure of CEO actions. I argue that empirical evidence on the use of RPE is mixed because previous studies rely on a misspecified peer group. External shocks and flexibility in responding to the shocks are functions of, for example, the firm's technology, the complexity of the organization, and the ability to access external credit, which depend on firm size. When peers are composed of similar industry-size firms, evidence is consistent with the use of RPE in CEO compensation.

Download or read book The Dual Role of Peer Groups in Executive Pay written by Robert F. Göx and published by . This book was released on 2008 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Peer Group Composition Peer Performance Aggregation and Detecting Relative Performance Evaluation written by Dirk E. Black and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study S&P 500 firms' disclosure of relative performance evaluation (RPE) details in their first proxy statement filing after the effective date of an SEC rule mandating expanded executive compensation disclosures. Using theoretically-developed implicit techniques to detect RPE use, we compare inferences from the explicit disclosures with inferences from the implicit tests. In our hand collection of each firm's first proxy statement after the expanded disclosure mandate, we identify 17.32% of the S&P 500 firms as explicit RPE disclosers. In the subsample of RPE disclosers, we find consistent implicit evidence of RPE as long as the peer group is composed either of firms in the same industry/size quartile or of firms named as peers in the explicit RPE disclosures. More importantly, in the subsample of explicit RPE non-disclosers, we also detect the use of RPE, using industry/size peer groups and weighting each peer's performance by each peer's correlation with systematic risk relative to each peer's idiosyncratic risk. Our inferences depend on assumptions about the choice of peers and the weights on those peers, suggesting important implications for RPE researchers. These findings also imply that relying on explicit mandated disclosures of RPE may understate the prevalence of RPE in practice.

Download or read book Implementing Relative Performance Evaluation written by Katharine D. Drake and published by . This book was released on 2019 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: The effectiveness of relative performance evaluation (RPE) in compensation contracts depends on a firm's ability to identify peers that are subject to similar exogenous shocks with similar abilities to respond to such shocks. We expand the RPE literature by considering whether firms routinely select peers sharing a life cycle stage in RPE implementation. We argue that life cycle captures similarities in underlying economics and homogeneity along a number of dimensions relevant in filtering systematic performance. Using explicit peer firm disclosures and a peer selection model, we show that firms routinely select life cycle peers. Further, using implicit RPE tests, we document evidence of life cycle peers filtering common performance incremental to previously identified peer groups. We provide some of the first evidence that peer group composition differs with differing characteristics of the firm and its industry, highlighting that peer selection is a dynamic process evolving with the firm's changing nature.

Download or read book Relative Performance Evaluation and the Use of Discretionary Bonuses in Executive Compensation written by Stephanie Tsui and published by . This book was released on 2013 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this study, I examine the extent to which firms rely on relative performance evaluation (RPE) when setting executive compensation. In particular, I examine whether firms use information about peer performance to determine compensation at the end of the year, i.e. after both firm and peer performance are observed. I find that RPE is most pronounced for firms that allow little or no scope for ex post subjective adjustments to annual bonuses. Conversely, firms that rely mainly on subjectivity in determining bonus exhibit little use of RPE. These findings suggest that information about peer performance is not used at the end of the year. Instead, peer performance seems to be incorporated in performance targets at the beginning of the year, at least among firms primarily using objective performance measurements. In addition, I provide new evidence on the determinants of the use of subjectivity.

Download or read book Does It Pay to Be Like Mike Aspirational Peer Firms and Relative Performance Evaluation written by Ryan T. Ball and published by . This book was released on 2018 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the manner and extent to which firms evaluate performance relative to aspirational peer firms. Guided by the predictions of an agency model, we find that CEO compensation increases in the correlation between own and aspirational peer firm performances. In addition, we define and test conditions where aggregate peer performance, which has been the primary focus of prior relative performance evaluation studies of competitive peers, is expected to have an association with CEO compensation. These conditions are supported by our empirical results. Finally, we document that our results are more pronounced when the firm-peer relationship is one-way and the peer firm is in a different industry and therefore is more aspirational.

Download or read book Common Vs Firm Specific Risks in Relative Performance Evaluation written by Martin G. H. Wu and published by . This book was released on 2013 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the trade-off between common and peers' specific risks in relative performance evaluation (RPE). We establish that in order to remove common risk completely from management compensation contracts, it is sufficient and necessary that peers' weighted specific risks are lower. Nonetheless, common risk needs not to be removed completely; the optimal use of RPE therefore entails a partial substitution of common for peers' specific risks unless firms can hedge against peers' specific risks. These results contribute to our understanding of factors affecting a firm's peer choices and provide specific implications for the weak- vs. strong-form RPE tests.

Download or read book Accounting Comparability and Relative Performance Evaluation in CEO Compensation written by Gerald J. Lobo and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate whether accounting comparability is associated with the likelihood that CEO compensation is tied to relative accounting performance (e.g., return on assets). We predict that higher accounting comparability increases the risk-sharing benefit of accounting-based RPE because peer firm performance better controls for common risk in RPE firm performance. Thus, firms that have higher accounting comparability with potential performance peers will be more likely to include accounting-based RPE as a component of the total CEO compensation contract. We find support for this prediction using (1) an explicit test design that relies on the ex-ante terms of CEO compensation contracts obtained from proxy disclosures, and (2) an implicit design that relies on the actual realizations of CEO compensation. To provide further evidence, we examine the association between accounting comparability and the selection of performance peers when the CEO compensation contract includes an accounting-based RPE component. We find that higher comparability between the RPE firm and a potential peer firm increases (decreases) the potential peer firm's likelihood of being selected into (dropped from) the peer group. Cross-sectional analyses show that this association is less pronounced, or not present, when the relative performance measure is price-based (as opposed to accounting-based), indicating that these results do not merely reflect a more general role of comparability in all RPE contracts.

Download or read book Relative Performance Evaluation Agent Hold up and Firm Organization written by and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Development of a Process Encompassing Identification of a Peer Group and Flattening of Metrics to Facilitate Relative Performance Evaluation written by Oliver Oberle and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Managers, owners and other stakeholders are interested in the performance of a firm, but pure financial results are insufficient to draw conclusions from as this neglects changes in the economic conditions. Therefore, these stakeholders often resort to comparing the performance of the firm in question with its peers who are subjected to the same set of exogenous circumstances. This thesis aims at shedding light on firstly which similarity criteria among companies are most apt at producing a meaningful comparison group and secondly how to remove non-operating distortions in financial statements in order to arrive at more relevant benchmark figures. Answers were sought by means of literature research, predominately in highly ranked academic journals. Findings outline that besides the two common similarity criteria (1) akin size and (2) same industry, there are further criteria increasing likeness. These are comparability in (3) business model, (4) company life cycle phase, (5) complexity, (6) cost of capital and (7) growth potential. Further, it could be shown that benchmarking is more meaningful if financial statements are modified to (1) represent the same financial year, (2) non-operating and one-time expenses as well as revenues are excluded, (3) intangible assets are made comparable in value and any (5) off-balance sheet items (OBS) are capitalised. Optional further measures to raise likeness are also indicated. In a first section the thesis is introduced while thereafter quality factors for the construction of a good peer group and distortions in financial statement comparison are identified by literature review. Following, the elaborated insights are applied, resulting in a systematic process to firstly filter the right peers and secondly to increase the respective financial statement's comparability. This process is in parallel supported by a real example before concluding the work.

Download or read book Do Growth Option Firms Use Less Relative Performance Evaluation written by Ana M. Albuquerque and published by . This book was released on 2013 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: The use of relative performance evaluation (RPE) in compensation contracts for CEOs at growth-option (GO) firms that operate in more volatile environments can provide insurance against common exogenous shocks and thus reduce the amount of risk that CEOs face. However, the implementation of RPE for high GO firms can be impaired by these firms' inability to find a peer group that captures common risk exposure. This paper studies GO firms' reliance on RPE and finds that the use of RPE in CEO compensation contracts varies negatively with a firm's level of growth options. The tests use three proxies for growth options: the market-to-book value of assets, research and development expenses scaled by assets, and a factor obtained from a principal component analysis. The results are robust to controlling for the impact of other firm characteristics on pay-for-performance sensitivities.

Download or read book Limits to Relative Performance Evaluation written by Irina Barakova and published by . This book was released on 2008 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Relative Performance Evaluation and the Timing of Earnings Release written by Guojin Gong and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Relative performance evaluation (RPE) compensates managers on their relative performance against a peer group. Since observing more peers' performance allows managers to better estimate the performance level required to achieve RPE targets, we conjecture that releasing earnings later than peers facilitates managers to achieve targets by exploiting last-minute reporting discretion. Empirical evidence is consistent with our conjecture. Further, managers tend to select peers that release earnings more timely and delay own firms' earnings releases to be later than peers' after RPE adoption. Our evidence suggests strategic timing of earnings release and discretionary reporting in response to relative performance evaluation.

Download or read book Exchange Rate Risk and Relative Performance Evaluation written by Bing Chen (Ph.D.) and published by . This book was released on 2017 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: The relative performance evaluation (RPE) hypothesis holds that executive compensation should not depend on uncontrollable exogenous shocks. Nevertheless, prior studies often find limited empirical support for this hypothesis in part because it is difficult to identify peers exposed to the same exogenous shocks. I propose a new way to identify peers and to test the RPE hypothesis in the context of a specific shock. In particular, I select peers based on the sensitivity of their stock returns to exchange rate fluctuations. I find evidence that firms respond to large exchange rate movements by ex post adjusting their peer selection to include peers with similar exchange rate risk exposure. Moreover, after allowing for ex post peer group adjustments, I find a much stronger support for the RPE hypothesis than most of prior work.

Download or read book The Handbook of the Economics of Corporate Governance written by Benjamin Hermalin and published by Elsevier. This book was released on 2017-09-18 with total page 762 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Handbook of the Economics of Corporate Governance, Volume One, covers all issues important to economists. It is organized around fundamental principles, whereas multidisciplinary books on corporate governance often concentrate on specific topics. Specific topics include Relevant Theory and Methods, Organizational Economic Models as They Pertain to Governance, Managerial Career Concerns, Assessment & Monitoring, and Signal Jamming, The Institutions and Practice of Governance, The Law and Economics of Governance, Takeovers, Buyouts, and the Market for Control, Executive Compensation, Dominant Shareholders, and more. Providing excellent overviews and summaries of extant research, this book presents advanced students in graduate programs with details and perspectives that other books overlook. Concentrates on underlying principles that change little, even as the empirical literature moves on Helps readers see corporate governance systems as interrelated or even intertwined external (country-level) and internal (firm-level) forces Reviews the methodological tools of the field (theory and empirical), the most relevant models, and the field’s substantive findings, all of which help point the way forward

Download or read book Relative Performance Evaluation in an Oligopoly written by Martin G. H. Wu and published by . This book was released on 2012 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The rationale of RPE use in executive pay is to filter out common risk, not firm idiosyncratic risk. As common risk is often interpreted casually as non-diversifiable and firms' idiosyncratic risks as totally independent of one another, we show that these casual interpretations contain three basic flaws and therefore are directly responsible for the RPE puzzle. First, common (non-diversifiable) risk needs filtering, but executives can personally consider it, implying that RPE use in executive pay to filter it out is unnecessary. Second, a firm's idiosyncratic risk is diversifiable for investors but not for the firm's executives; therefore it too needs to be reduced through filtering. Third, this latter risk reduction would be impossible, however, if all firms' idiosyncratic risks were totally independent of each other. This view of total independence among firms' idiosyncratic risks may be harmless from one firm and duopoly's standpoint, but it is clearly unrealistic and no longer innocuous, because two firms can share unique shocks not shared by another, or all other firms, in an oligopoly. These unique shocks represent correlated firm idiosyncratic risks which may also be filtered out through RPE-related peer-group selections; yet they do not fit into the casual interpretation of common risk.

Download or read book Peer Group Composition and Aggregation for RPE Purposes in Presence of Exposure Risk written by Lars Kabitz and published by . This book was released on 2017 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: Agency theory suggests the use relative performance evaluation (RPE) to filter out systematic risks from a noisy performance measure. The presence of exposure risk, i.e. if the exposure to the systematic risks moves over time, however precludes complete filtering. In the present study I first estimate the exposure of a firm's performance to the performance of potential peer firms in order to construct a firm-specific peer group. Second, I investigate how the presence of exposure risk can affect the composition and aggregation of a peer group over time. Third, I show how these movements in the peer group composition and aggregation can reduce the effectiveness of the filtering purpose in RPE settings. I find that the firm-specific peer groups provide good filtering abilities ex post, but that simple indices, such as industry peer groups, are more stable and thus perform better out-of-sample.