Peer Group Composition, Peer Performance Aggregation, and Detecting Relative Performance Evaluation
Dirk E. Black
Tuck School of Business at Dartmouth
Shane S. Dikolli
Duke University - Fuqua School of Business
Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)
June 8, 2015
AAA 2012 Management Accounting Section (MAS) Meeting Paper
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.
Number of Pages in PDF File: 37
Keywords: relative performance evaluation, peer performance, aggregation, peer composition
JEL Classification: J33, J41
Date posted: August 17, 2011 ; Last revised: June 9, 2015
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