Incentive Contracts and Corporate Disclosure: Evidence from Relative Performance Evaluation

58 Pages Posted: 18 Feb 2021

See all articles by Melissa Martin

Melissa Martin

University of Illinois at Chicago

Oscar Timmermans

Maastricht University

Date Written: February 7, 2021

Abstract

As the proprietary cost of mandatory disclosure increases, managers withhold information from mandatory disclosure and substitute less proprietary voluntary disclosure. In this study, we examine the role managers’ incentive-compensation contracts play in this disclosure tactic. Specifically, we examine how contracts that explicitly evaluate managers on peer performance are associated with: (1) the transparency of mandatory disclosure; (2) the provision of voluntary disclosure; and (3) the substitution between the two. We show that the sign of substitution depends critically on whether managers compete with peers for market prices or accounting numbers. Moreover—and consistent with our theoretical prediction—we show that the magnitude of substitution is greater for managers facing intense strategic interactions with peers. Collectively, our findings suggest that disclosure-specific costs should be interpreted more broadly, as proprietary costs to one manager may arise—or perhaps more importantly, not arise—because of characteristics of managers at other firms.

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

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

Suggested Citation

Martin, Melissa and Timmermans, Oscar, Incentive Contracts and Corporate Disclosure: Evidence from Relative Performance Evaluation (February 7, 2021). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
92
Abstract Views
378
rank
344,290
PlumX Metrics