Limits to relative performance evaluation: evidence from bank executive turnover
Purpose - The paper aims to revisit the topic of relative performance evaluation (RPE) of top management using a large panel of community banks. Design/methodology/approach - The empirical tests for RPE utilized a two-stage approach in a unique dataset of community banks executive turnover over a ten-year period. This allowed the authors to better estimate the benchmark performance relative to which bank executives should be evaluated under RPE. Moreover, bank regulatory evaluations allowed the authors to control for the impact of poor governance. Findings - The paper shows that penalizing executives for poor performance arising from economic downturns is not necessarily inconsistent with the theory. The empirical results indicate that weak downturn-linked performance is strongly related to increased executive turnover. Furthermore, this relationship is more pronounced in better-governed banks, which are more likely to engage in value-enhancing disciplinary actions. Research limitations/implications - The analysis suggests that executive dismissals during adverse economic conditions are not necessarily a result of bad luck; rather, the analysis implies that bad times are informative about management quality. Practical implications - The main practical implication is that both relative and absolute performance should be incorporated in the incentive structure of bank executives. Originality/value - The paper shows that the assumptions used in prior RPE studies may not be applicable to top executives which could explain the inconsistency between the theory and the empirical evidence. Further, the finding that better governed firms are more likely to penalize management for bad exogenously driven performance is unique and strengthens the case that disciplinary actions amid adverse economic times may not be due to bad luck.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 2 (2010)
Issue (Month): 3 (August)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://www.emeraldinsight.com/jfep.htm Email:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Blackwell, David W. & Brickley, James A. & Weisback, Michael S., 1994. "Accounting information and internal performance evaluation : Evidence from Texas banks," Journal of Accounting and Economics, Elsevier, vol. 17(3), pages 331-358, May.
- Garvey, Gerald T. & Milbourn, Todd T., 2006. "Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad," Journal of Financial Economics, Elsevier, vol. 82(1), pages 197-225, October.
- Cook, Douglas O. & Hogan, Arthur & Kieschnick, Robert, 2004. "A study of the corporate governance of thrifts," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1247-1271, June.
- Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
- Albuquerque, Ana, 2009. "Peer firms in relative performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 69-89, October.
- Borokhovich, Kenneth A. & Parrino, Robert & Trapani, Teresa, 1996. "Outside Directors and CEO Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 337-355, September.
- Jay Dahya & John J. McConnell & Nickolaos G. Travlos, 2002. "The Cadbury Committee, Corporate Performance, and Top Management Turnover," Journal of Finance, American Finance Association, vol. 57(1), pages 461-483, 02.
- Gunther, Jeffery W. & Moore, Robert R., 2003.
"Loss underreporting and the auditing role of bank exams,"
Journal of Financial Intermediation,
Elsevier, vol. 12(2), pages 153-177, April.
- Jeffery W. Gunther & Robert R. Moore, 2002. "Loss underreporting and the auditing role of bank exams," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
- DeFond, Mark L. & Park, Chul W., 1999. "The effect of competition on CEO turnover1," Journal of Accounting and Economics, Elsevier, vol. 27(1), pages 35-56, February.
- Stephen D. Prowse, 1995. "Alternative methods of corporate control in commercial banks," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 24-36.
- Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
- Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
- Stephen D. Prowse, 1995. "Alternative methods of corporate control in commercial banks," Working Papers 9507, Federal Reserve Bank of Dallas.
- Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eme:jfeppp:v:2:y:2010:i:3:p:214-236. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.