Do Corporate Insiders Use External Signals in Performance Evaluation? Evidence on SEC Comment Letters

41 Pages Posted: 18 Dec 2018 Last revised: 17 Jan 2019

See all articles by Si Chen

Si Chen

Central University of Finance and Economics (CUFE)

Rong Huang

City University of New York (CUNY) - Stan Ross Department of Accountancy

Bo Zhang

School of Business, Renmin University of China

Ran Zhang

Guanghua School of Management

Date Written: November 28, 2018

Abstract

Prior research shows that SEC comment letters provide useful information to outsiders of the firm. However, whether insiders such as boards of directors use SEC comment letters for internal performance evaluation purpose has not been studied. We find that firms reduce CEO annual bonuses after receiving SEC comment letters relating to revenue recognition. We further document that this negative effect is stronger for high-growth firms, firms with less powerful CEOs and firms with higher institutional ownership. We also show that CFO bonuses are lower after receiving revenue recognition comment letters. Our results are robust to using comment letter disclosure returns to measure comment letter materialness and controlling for the endogeneity of receiving SEC comment letters. Overall, the evidence indicates that the board of director incorporates the information provided in SEC comment letters in setting executive pay, suggesting that the board of directors adjusts the performance evaluation system ex post upon observing a negative non-financial signal triggered from the outside.

Keywords: SEC comment letters, executive compensation, CEO duality, institutional ownership

JEL Classification: M12, M41, M48

Suggested Citation

Chen, Si and Huang, Rong and Zhang, Bo and Zhang, Ran, Do Corporate Insiders Use External Signals in Performance Evaluation? Evidence on SEC Comment Letters (November 28, 2018). Baruch College Zicklin School of Business Research Paper No. 2019-01-02. Available at SSRN: https://ssrn.com/abstract=3292022 or http://dx.doi.org/10.2139/ssrn.3292022

Si Chen

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Rong Huang

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
(646)312-3204 (Phone)

Bo Zhang (Contact Author)

School of Business, Renmin University of China ( email )

59 Zhongguancun Street
Haidian District
Beijing, 100872
China
86-10-62514992 (Phone)

Ran Zhang

Guanghua School of Management ( email )

Beijing, 100871
China
86-10-62756911 (Phone)

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