Relative Performance Evaluation and Earnings Management*

• 成果类型: Article
• 署名作者: Infuehr, Jakob
• 署名单位: University of Southern Denmark
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12731
• 发表日期: 2022
• 页码: 607-627
• 关键词: executive-compensation; moral hazard; aggregation; forecasts; luck; CEOS

摘要

Conventional agency theory suggests that firms should benchmark CEO compensation to absorb systemic risk and to more efficiently incentivize executives to work hard. Yet empirical research has found only a modest use of benchmarking in CEO compensation contracts. In this paper, I highlight one weakness of relative performance evaluation (RPE). When earnings management is possible, benchmarking creates stronger incentives for misreporting performance measures compared to benchmark-independent pay. The optimal contract will depend less on a correlated benchmark (e.g., a stock market index) if it is easier for the manager to misreport performance. Thus, the model predicts that firms with weak internal controls and bad auditors are less likely to use RPE, offering a theoretical explanation for the empirically observed lack of RPE use.