Peer-Specific Knowledge and Peer Group Properties in Relative Performance Evaluation

Journal of Management Accounting Research, In-Press, https://doi.org/10.2308/JMAR-2022-013

Posted: 24 Oct 2020 Last revised: 23 Oct 2023

See all articles by Chung-Yu Hung

Chung-Yu Hung

University of Melbourne

Zhenyang Shi

BI Norwegian Business School

Date Written: September 19, 2023

Abstract

Although relative performance evaluation (RPE) represents an important compensation practice, selecting a relevant peer firm poses a challenge for compensation committees. We study the implications of a committee’s peer-specific knowledge for the peer group property (i.e., RPE relevance). Committees likely know more about firms within their networks, and such peer-specific knowledge increases with their connections to potential peer firms. Our findings suggest that peer-specific knowledge facilitates not only the inclusion of more relevant peer firms, but also the exclusion of less relevant ones. Moreover, the committees incorporate connected peers’ performance information to a greater extent for risk removal. We address identification challenges by including an intensive set of fixed effects to control for characteristics of the focal and the peer firms and by exploiting exogenous changes to the connections between the committees and the peer firms. Our findings suggest that the compensation committee’s peer-specific knowledge facilitates the RPE practice.

Keywords: Peer-Specific Knowledge; Social Connections; Relative Performance Evaluation; Compensation Committee

JEL Classification: D22; M52; I19

Suggested Citation

Hung, Chung-Yu and Shi, Zhenyang, Peer-Specific Knowledge and Peer Group Properties in Relative Performance Evaluation (September 19, 2023). Journal of Management Accounting Research, In-Press, https://doi.org/10.2308/JMAR-2022-013, Available at SSRN: https://ssrn.com/abstract=3687291

Chung-Yu Hung (Contact Author)

University of Melbourne ( email )

198 Berkeley Street
Melbourne, Victoria 3053
Australia

Zhenyang Shi

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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