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Relative Performance Evaluation Hypothesis
BibTeX
@MISC{Anderson_relativeperformance,
author = {Mark C. Anderson and Rajiv D. Banker and Sury Ravindran},
title = {Relative Performance Evaluation Hypothesis},
year = {}
}
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Abstract
In spite of strong theoretical motivation, empirical studies of executive compensation have provided only limited evidence of relative performance evaluation (RPE). Some research findings support a weak-form RPE hypothesis that executive pay is positively related to firm performance and negatively related to peer-group performance, but there is little support for the strong-form RPE hypothesis that performance shocks common to a firm and its peers are removed when executive performance is evaluated for compensation purposes. Whether this lack of empirical evidence is due to limited use of RPE by companies or misspecification of empirical models is an unresolved research issue. Previous studies of RPE have not recognized two-way relations between pay and performance that are fundamental to the agency models – performance affects pay and pay affects performance. In this study, we estimate models of RPE that recognize this simultaneity between pay and performance. In contrast to previous findings, our results support strong and weak form RPE with respect to both accounting and stock returns for a large cross-section of firms.
Keyphrases
relative performance evaluation hypothesis executive pay weak-form rpe hypothesis unresolved research issue executive compensation research finding weak form rpe large cross-section previous study relative performance evaluation affect performance previous finding empirical evidence empirical study little support agency model performance affect executive performance stock return limited use empirical model performance shock limited evidence compensation purpose two-way relation strong theoretical motivation firm performance strong-form rpe hypothesis peer-group performance
