Peer Firms in Relative Performance Evaluation
Ana M. Albuquerque
Boston University School of Management
March 26, 2009
Journal of Accounting & Economics (JAE), Forthcoming
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.
Number of Pages in PDF File: 50
JEL Classification: J33, G34, G32working papers series
Date posted: March 27, 2009 ; Last revised: April 20, 2009
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