Product Market Peers and Relative Performance Evaluation

The Accounting Review, forthcoming

57 Pages Posted: 19 Jul 2015 Last revised: 21 Sep 2020

See all articles by Sudarshan Jayaraman

Sudarshan Jayaraman

University of Rochester - Simon Business School

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Florian S. Peters

University of Amsterdam

Hojun Seo

Purdue University

Date Written: September 19, 2020

Abstract

We investigate the role of Relative Performance Evaluation (RPE) theory in CEO pay and turnover using a product similarity-based definition of peers (Hoberg and Phillips 2016). RPE predicts that firms filter out common shocks (i.e., those affecting the firm and its peers) while evaluating CEO performance and that the extent of filtering increases with the number of peers. Despite the intuitive appeal of the theory, previous tests of RPE find weak and inconsistent evidence, which we argue is due to the imprecise categorization of peers. Using product market peers, we find three pieces of evidence consistent with RPE in relation to CEO pay and forced turnover: (i) on average, firms partially filter out common shocks to stock returns, (ii) the extent of filtering increases with the number of peers, and (iii) firms completely filter out common shocks in the presence of a large number of peers.

Keywords: Product market peers, relative performance evaluation, CEO compensation, and forced CEO turnover

JEL Classification: M40; M41; G30; J33

Suggested Citation

Jayaraman, Sudarshan and Milbourn, Todd T. and Peters, Florian S. and Seo, Hojun, Product Market Peers and Relative Performance Evaluation (September 19, 2020). The Accounting Review, forthcoming, Available at SSRN: https://ssrn.com/abstract=2632153 or http://dx.doi.org/10.2139/ssrn.2632153

Sudarshan Jayaraman (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School ( email )

1 Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

Florian S. Peters

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TW
Netherlands

Hojun Seo

Purdue University ( email )

403 W State St
West Lafayette, IN 47907
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
683
Abstract Views
3,908
rank
46,557
PlumX Metrics