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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. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
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    4. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 1999-2043, December.
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    6. Antle, R & Smith, A, 1986. "An Empirical-Investigation Of The Relative Performance Evaluation Of Corporate-Executives," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 24(1), pages 1-39.
    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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