Choosing the Precision of Performance Metrics

43 Pages Posted: 27 Jun 2013 Last revised: 15 Jul 2017

See all articles by Alan D. Crane

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business

Andrew Koch

University of Pittsburgh - Finance Group

Chishen Wei

Singapore Management University - Lee Kong Chian School of Business

Date Written: April 12, 2017

Abstract

There is a standard trade-off in contracts between the provision of incentives and insurance. We hypothesize that this trade-off influences the precision with which firm performance is measured. We find that firm outcomes are measured less precisely when chance plays a large role in these outcomes. Further, this precision is determined through the choice of shares outstanding. This has several novel implications. Nominal stock prices can remain constant over time, and firms with unpredictable cash flows should have more shares and lower stock price levels, all else equal. We find evidence consistent with these implications.

Keywords: Compensation, performance benchmarks, stock splits

JEL Classification: G10, M41

Suggested Citation

Crane, Alan D. and Koch, Andrew and Wei, Chishen, Choosing the Precision of Performance Metrics (April 12, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2285770 or http://dx.doi.org/10.2139/ssrn.2285770

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Andrew Koch (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States

Chishen Wei

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore
Singapore

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