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Exchange Rate Risk and Relative Performance Evaluation

Author

Listed:
  • Bing Chen

    (Department of Accounting, Wenzhou-Kean University, Wenzhou 325060, China)

  • Wei Chen

    (Department of Accounting, University of Connecticut, Storrs, CT 06269, USA)

  • Xiaohui Yang

    (Department of Finance, Fairleigh Dickinson University, Teaneck, NJ 07666, USA)

Abstract

The relative performance evaluation (RPE) hypothesis posits that executive compensation should not be influenced by uncontrollable exogenous shocks. However, prior studies often find limited empirical support for this hypothesis, partly because identifying peers exposed to the same exogenous shocks is challenging. We propose a new method for identifying peers and testing the RPE hypothesis within the context of exchange rate risk. Specifically, we select peers based on the sensitivity of their stock returns to exchange rate fluctuations. We find evidence that firms respond to significant exchange rate movements by ex post adjusting their peer selection to include peers with similar exchange rate risk exposure. Furthermore, after accounting for ex post peer group adjustments, we find much stronger support for the RPE hypothesis than prior studies.

Suggested Citation

  • Bing Chen & Wei Chen & Xiaohui Yang, 2025. "Exchange Rate Risk and Relative Performance Evaluation," JRFM, MDPI, vol. 18(6), pages 1-17, June.
    • Handle: RePEc:gam:jjrfmx:v:18:y:2025:i:6:p:310-:d:1672759
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    References listed on IDEAS

    as
    1. John M. Abowd & David S. Kaplan, 1999. "Executive Compensation: Six Questions That Need Answering," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 145-168, Fall.
    2. Janakiraman, Sn & Lambert, Ra & Larcker, Df, 1992. "An Empirical-Investigation Of The Relative Performance Evaluation Hypothesis," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 30(1), pages 53-69.
    3. Allayannis, George & Ofek, Eli, 2001. "Exchange rate exposure, hedging, and the use of foreign currency derivatives," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 273-296, April.
    4. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    5. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    6. Bing Chen & Wei Chen & Xiaohui Yang, 2025. "Does Information Asymmetry Affect Firm Disclosure? Evidence from Mergers and Acquisitions of Financial Institutions," JRFM, MDPI, vol. 18(2), pages 1-28, January.
    7. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563, Elsevier.
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    Full references (including those not matched with items on IDEAS)

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