Product Market Peers and Relative Performance Evaluation

The Accounting Review, Vol. 96 (4), pp. 341–366, July 2021

57 Pages Posted: 19 Jul 2015 Last revised: 9 Nov 2021

See all articles by Sudarshan Jayaraman

Sudarshan Jayaraman

University of Rochester - Simon Business School; Simon Business School, University of Rochester

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Florian S. Peters

University of Amsterdam

Hojun Seo

Purdue University - Krannert School of Management

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 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, Vol. 96 (4), pp. 341–366, July 2021, Available at SSRN: https://ssrn.com/abstract=2632153 or http://dx.doi.org/10.2139/ssrn.2632153

Sudarshan Jayaraman (Contact Author)

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3491 (Phone)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3491 (Phone)

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 - Krannert School of Management ( email )

403 W State St
West Lafayette, IN 47907
United States

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