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

47 Pages Posted: 18 Dec 2018 Last revised: 3 Mar 2020

See all articles by Si Chen

Si Chen

Central University of Finance and Economics (CUFE)

Rong Huang

Department of Accounting, School of Management, Fudan University

Bo Zhang

School of Business, Renmin University of China

Ran Zhang

Renmin University of China - School of Business

Date Written: February 27, 2020

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 the purpose of internal performance evaluation has not been studied. We find that firms reduce CEO annual bonuses after receiving SEC comment letters related 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 non-transient institutional investors. The results are robust to using comment letter disclosure returns to measure their materialness and controlling for the endogeneity of receiving these letters. Overall, the evidence indicates that the board of directors 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, government monitoring

JEL Classification: M41, M46, 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 (February 27, 2020). 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

Department of Accounting, School of Management, Fudan University ( email )

670 Guoshun Rd.,
Shanghai, Shanghai
China

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

Renmin University of China - School of Business ( email )

Beijing
China

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