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
Date Written: November 28, 2018
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
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