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Relative peer quality and firm performance

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  • Francis, Bill
  • Hasan, Iftekhar
  • Mani, Sureshbabu
  • Ye, Pengfei

Abstract

We examine the performance impact of the relative quality of a Chief Executive Officer (CEO)’s compensation peers (peers to determine a CEO's overall compensation) and bonus peers (peers to determine a CEO's relative-performance-based bonus). We use the fraction of peers with greater managerial ability scores (Demerjian, Lev, and McVay, 2012) than the reporting firm to measure this CEO's relative peer quality (RPQ). We find that firms with higher RPQ earn higher stock returns and experience higher profitability growth than firms with lower RPQ. Learning among peers and the increased incentive to work harder induced by the peer-based tournament contribute to RPQ's performance effect.

Suggested Citation

  • Francis, Bill & Hasan, Iftekhar & Mani, Sureshbabu & Ye, Pengfei, 2016. "Relative peer quality and firm performance," Journal of Financial Economics, Elsevier, vol. 122(1), pages 196-219.
    • Handle: RePEc:eee:jfinec:v:122:y:2016:i:1:p:196-219
    DOI: 10.1016/j.jfineco.2016.06.002
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    More about this item

    Keywords

    Relative peer quality; Firm performance; Tournament; Optimal contract;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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