Renegotiation and Relative Performance Evaluation: Why an Informative Signal May Be Useless

39 Pages Posted: 11 Aug 1999 Last revised: 27 Apr 2010

See all articles by Andrew Yim

Andrew Yim

Cass Business School, City, University of London

Date Written: October 28, 2000

Abstract

Although Holmstrom's informativeness criterion provides a theoretical foundation for the controllability principle and interfirm relative performance evaluation, empirical and field studies provide only weak evidence on such practices. This paper refines the traditional informativeness criterion by abandoning the conventional full-commitment assumption. With the possibility of renegotiation, a signal's usefulness in incentive contracting depends on its information quality, not simply on whether the signal is informative. This paper derives conditions for determining when a signal is useless and when it is useful. In particular, these conditions will be met when the signal's information quality is either sufficiently poor or sufficiently rich.

Keywords: Informativeness, monitoring, renegotiation, principal-agent model

JEL Classification: C72, D82, M40, M46, J33

Suggested Citation

Yim, Andrew, Renegotiation and Relative Performance Evaluation: Why an Informative Signal May Be Useless (October 28, 2000). Review of Accounting Studies, Vol. 6, No. 1, 2001, Available at SSRN: https://ssrn.com/abstract=170695 or http://dx.doi.org/10.2139/ssrn.170695

Andrew Yim (Contact Author)

Cass Business School, City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.cass.city.ac.uk/faculties-and-research/experts/andrew-yim

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