Disclosure Costs of Relative Performance Evaluation

61 Pages Posted: 18 Feb 2021 Last revised: 27 Feb 2025

See all articles by Melissa Martin

Melissa Martin

University of Illinois at Chicago

Oscar Timmermans

London School of Economics & Political Science (LSE)

Date Written: February 27, 2025

Abstract

Relative performance evaluation has become an increasingly common component of executive compensation contracts. We study how these incentive plans relate to corporate disclosure and predict that they introduce an incremental disclosure cost. This cost arises because disclosures can help competitors make better investment decisions, enhancing their performance and thereby reducing managers’ expected compensation. Consistent with this prediction, we find a negative association between relative performance plans and voluntary, value-relevant management forecasts, alongside a positive association with redactions in mandatory filings. This pattern is specific to plans with accounting-based metrics and absent for plans with price-based metrics. The results for price-based metrics are consistent with the idea that the incentive to reduce information asymmetry with market participants outweighs disclosure costs in these plans. The results for accounting-based metrics are more pronounced for managers whose plans provide stronger incentives and for those whose forecasts provide meaningful information spillovers to peers. Overall, this paper contributes the idea that relative performance plans can impose disclosure costs, thereby shedding light on contracting mechanisms that discourage disclosure—a less well-understood aspect of disclosure research.

Keywords: information disclosure, capital markets, relative performance evaluation, proprietary costs

JEL Classification: D22, D82, J33, L1, M12, M48

Suggested Citation

Martin, Melissa and Timmermans, Oscar, Disclosure Costs of Relative Performance Evaluation (February 27, 2025). Available at SSRN: https://ssrn.com/abstract=3780997 or http://dx.doi.org/10.2139/ssrn.3780997

Melissa Martin

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Oscar Timmermans (Contact Author)

London School of Economics & Political Science (LSE) ( email )

44 Lincoln’s Inn Fields
London, WC2A 3LY
United Kingdom

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