Managerial Incentives, Disclosure, and Disclosure Substitution: Evidence from Relative Performance Evaluation

61 Pages Posted: 18 Feb 2021 Last revised: 13 Oct 2021

See all articles by Melissa Martin

Melissa Martin

University of Illinois at Chicago

Oscar Timmermans

London School of Economics & Political Science (LSE)

Date Written: October 12, 2021

Abstract

We examine the relation between managerial incentives and disclosure. Specifically, we examine how contracts that explicitly evaluate managers relative to 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 find a negative relation between relative performance plans in which competition with peers is strong and both the transparency of mandatory disclosure and the provision of voluntary disclosure. Moreover—and consistent with our theoretical prediction—we show that the substitution between the two depends critically on whether managers compete with peers for market prices or accounting numbers. We further show that boards’ contract-design choices for these incentive plans are consistent with proprietary cost considerations. Collectively, our findings suggest that managerial incentives can motivate managers to abandon the novel “disclosure substitution” strategy.

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, Managerial Incentives, Disclosure, and Disclosure Substitution: Evidence from Relative Performance Evaluation (October 12, 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

Oscar Timmermans (Contact Author)

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

Houghton Street
London, WC2A 2AE
United Kingdom

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