Discretion in Financial Reporting: The Use of Self-Constructed Peer Groups in Proxy Statement Performance Graphs

Posted: 20 Aug 1998

See all articles by John W. Byrd

John W. Byrd

University of Colorado at Denver

Marilyn F. Johnson

Michigan State University - Department of Accounting & Information Systems

Susan L. Porter

University of Virginia - McIntire School of Commerce

Date Written: October 1995

Abstract

We examine how firms exercise reporting discretion when preparing the performance graph required under the SEC's new compensation disclosure rules. Results from a sample of 449 S&P 500 firms, 31.4% of whom self-constructed a peer group, indicate that three sets of factors -- the firm's visibility in the compensation debate, the level of monitoring, and the suitability of the public index for use in peer group comparisons -- explain both the decision to self-construct a peer group and the performance of the self-constructed peer group relative to the corresponding public industry index. We further find that self-constructed peer groups are "opportunistic" in that self-constructed indexes enhance the reporting companies' relative performance compared to performance measured relative to the company's S&P industry index. Paradoxically, self-constructed peer groups are also "informative" in that they explain cross-sectional variation in firm performance, firm size, and firm risk incremental to that explained by public indexes. Thus, a characterization of self-constructed peer groups as indicative of self-serving behavior on the part of managers is overly simplistic.

JEL Classification: G10

Suggested Citation

Byrd, John W. and Johnson, Marilyn F. and Porter, Susan Lynne, Discretion in Financial Reporting: The Use of Self-Constructed Peer Groups in Proxy Statement Performance Graphs (October 1995). Available at SSRN: https://ssrn.com/abstract=2528

John W. Byrd

University of Colorado at Denver ( email )

Department of Finance
Denver, CO
United States
970-247-9182 (Phone)

Marilyn F. Johnson (Contact Author)

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-432-0152 (Phone)
517-432-1101 (Fax)

Susan Lynne Porter

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434243-2961 (Phone)
434-924-7074 (Fax)

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