Peer Group Composition, Peer Performance Aggregation, and Detecting Relative Performance Evaluation

37 Pages Posted: 17 Aug 2011 Last revised: 9 Jun 2015

Dirk E. Black

Tuck School of Business at Dartmouth

Shane S. Dikolli

Duke University - Fuqua School of Business

Christian Hofmann

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Date Written: June 8, 2015

Abstract

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.

Keywords: relative performance evaluation, peer performance, aggregation, peer composition

JEL Classification: J33, J41

Suggested Citation

Black, Dirk E. and Dikolli, Shane S. and Hofmann, Christian, Peer Group Composition, Peer Performance Aggregation, and Detecting Relative Performance Evaluation (June 8, 2015). AAA 2012 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1910846 or http://dx.doi.org/10.2139/ssrn.1910846

Dirk E. Black

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-9635 (Phone)

Shane Sami Dikolli (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-1949 (Phone)
919-869-1901 (Fax)

Christian Hofmann

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, 80539
Germany

Paper statistics

Downloads
408
Rank
56,828
Abstract Views
1,540