Relative Performance Evaluation and Contagion in Financial Reporting Quality

78 Pages Posted: 11 May 2022 Last revised: 29 Oct 2024

See all articles by Deniz Anginer

Deniz Anginer

Simon Fraser University (SFU)

Paul J. Irvine

Neeley School of Business

Jinjing Liu

Moravian University

Çelim Yıldızhan

Koç University; University of Nevada Las Vegas

Date Written: July 11, 2023

Abstract

We examine the effect of relative performance evaluation contracts on a company’s financial reporting quality. Using data on actual peer firms, we find that the adoption of relative performance evaluation provides financial incentives for earnings management. On average, higher earnings management in the set of peer firms leads to higher earnings management in the target firm. If the peer firm also uses the target firm as its peer in their incentive plans, this mutual benchmarking strengthens the earnings management contagion effect. The contagion effect is weaker if there are significant differences in performance, as well as in incentives and costs of earnings management between the target firm and its peers.

Keywords: Relative performance evaluation, Earnings management, Earnings quality contagion, Financial reporting quality, Relative Performance Evaluation and Contagion in Earnings Management

Suggested Citation

Anginer, Deniz and Irvine, Paul J. and Liu, Jinjing and Yıldızhan, Çelim, Relative Performance Evaluation and Contagion in Financial Reporting Quality (July 11, 2023). Available at SSRN: https://ssrn.com/abstract=4101965 or http://dx.doi.org/10.2139/ssrn.4101965

Deniz Anginer

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Paul J. Irvine

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Jinjing Liu (Contact Author)

Moravian University ( email )

Bethlehem, PA 18018
United States

Çelim Yıldızhan

Koç University ( email )

College of Administrative Sciences and Economics
Rumeli Feneri Yolu, Sariyer
Istanbul, 34450
Turkey

University of Nevada Las Vegas ( email )

4505 S Maryland Pkwy, Las Vegas, NV 89154
Las Vegas, NV NV 89119
United States

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