IDEAS home Printed from https://ideas.repec.org/p/bof/bofrdp/2016_006.html
   My bibliography  Save this paper

Relative peer quality and firm performance

Author

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

Abstract

​This study examines the performance impact of the relative quality of a CEO’s compensation peers (peers selected to determine a CEO’s overall compensation) and bonus peers (peers selected 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 tend to earn superior risk-adjusted stock returns and experience higher profitability growth compared with firms that have lower RPQ. These results cannot be fully explained by a CEO’s power, compensation level, intrinsic talent, nor by the board’s possible motivation to use peers to signal a firm’s prospect. Learning among peers and the increased incentive to work harder induced by the peer-based tournament, however, might contribute to RPQ’s positive performance effect. Preliminary evidence also shows that high RPQ is not associated with increased earnings management or increased risk-taking behaviors.

Suggested Citation

  • Francis, Bill & Hasan, Iftekhar & Mani, Sureshbabu & Ye, Pengfei, 2016. "Relative peer quality and firm performance," Research Discussion Papers 6/2016, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2016_006
    as

    Download full text from publisher

    File URL: https://helda.helsinki.fi/bof/bitstream/123456789/14067/1/BoF_DP_1606.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 49-100.
    3. Mark T. Leary & Michael R. Roberts, 2014. "Do Peer Firms Affect Corporate Financial Policy?," Journal of Finance, American Finance Association, vol. 69(1), pages 139-178, February.
    4. Murphy, Kevin J. & Sandino, Tatiana, 2010. "Executive pay and "independent" compensation consultants," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 247-262, April.
    5. Foucault, Thierry & Fresard, Laurent, 2014. "Learning from peers' stock prices and corporate investment," Journal of Financial Economics, Elsevier, vol. 111(3), pages 554-577.
    6. Roger K. Loh & René M. Stulz, 2011. "When Are Analyst Recommendation Changes Influential?," Review of Financial Studies, Society for Financial Studies, vol. 24(2), pages 593-627.
    7. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    8. At, Christian & Béal, Sylvain & Morand, Pierre-Henri, 2015. "Freezeout, compensation rules, and voting equilibria," International Review of Law and Economics, Elsevier, vol. 41(C), pages 91-102.
    9. Adair Morse & Vikram Nanda & Amit Seru, 2011. "Are Incentive Contracts Rigged by Powerful CEOs?," Journal of Finance, American Finance Association, vol. 66(5), pages 1779-1821, October.
    10. 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.
    11. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    12. Albuquerque, Ana, 2009. "Peer firms in relative performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 69-89, October.
    13. Eliezer M. Fich & Anil Shivdasani, 2006. "Are Busy Boards Effective Monitors?," Journal of Finance, American Finance Association, vol. 61(2), pages 689-724, April.
    14. Albuquerque, Ana M. & De Franco, Gus & Verdi, Rodrigo S., 2013. "Peer choice in CEO compensation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 160-181.
    15. Bizjak, John & Lemmon, Michael & Nguyen, Thanh, 2011. "Are all CEOs above average? An empirical analysis of compensation peer groups and pay design," Journal of Financial Economics, Elsevier, vol. 100(3), pages 538-555, June.
    16. AfDB AfDB, . "Compendium of Statistics on Bank Group Operations 2013," Compendium of Statistics on AfDB Group Operations, African Development Bank, number 454.
    17. Marianne Bertrand & Antoinette Schoar, 2003. "Managing with Style: The Effect of Managers on Firm Policies," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1169-1208.
    18. Michael Faulkender & Jun Yang, 2013. "Is Disclosure an Effective Cleansing Mechanism? The Dynamics of Compensation Peer Benchmarking," Review of Financial Studies, Society for Financial Studies, vol. 26(3), pages 806-839.
    19. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    20. 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.
    21. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    22. Jeffrey L. Coles & Naveen D. Daniel & Lalitha Naveen, 2014. "Co-opted Boards," Review of Financial Studies, Society for Financial Studies, vol. 27(6), pages 1751-1796.
    23. Jayant R. Kale & Ebru Reis & Anand Venkateswaran, 2009. "Rank‐Order Tournaments and Incentive Alignment: The Effect on Firm Performance," Journal of Finance, American Finance Association, vol. 64(3), pages 1479-1512, June.
    24. Daniel, Kent, et al, 1997. "Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-1058, July.
    25. Gerard Hoberg & Gordon Phillips, 2016. "Text-Based Network Industries and Endogenous Product Differentiation," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1423-1465.
    26. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-479, June.
    27. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 193-228.
    28. Renée B. Adams & Heitor Almeida & Daniel Ferreira, 2005. "Powerful CEOs and Their Impact on Corporate Performance," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1403-1432.
    29. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    30. Cadman, Brian & Carter, Mary Ellen & Hillegeist, Stephen, 2010. "The incentives of compensation consultants and CEO pay," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 263-280, April.
    31. Bengt Holmstrom & Steven N. Kaplan, 2003. "The State Of U.S. Corporate Governance: What'S Right And What'S Wrong?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(3), pages 8-20, March.
    32. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    33. Cohen, Daniel A. & Zarowin, Paul, 2010. "Accrual-based and real earnings management activities around seasoned equity offerings," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 2-19, May.
    34. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    35. Larcker, David F. & So, Eric C. & Wang, Charles C.Y., 2013. "Boardroom centrality and firm performance," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 225-250.
    36. Peter Demerjian & Baruch Lev & Sarah McVay, 2012. "Quantifying Managerial Ability: A New Measure and Validity Tests," Management Science, INFORMS, vol. 58(7), pages 1229-1248, July.
    37. Bizjak, John M. & Lemmon, Michael L. & Naveen, Lalitha, 2008. "Does the use of peer groups contribute to higher pay and less efficient compensation?," Journal of Financial Economics, Elsevier, vol. 90(2), pages 152-168, November.
    38. Gerard Hoberg & Gordon Phillips, 2010. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3773-3811, October.
    39. John R. Graham & Si Li & Jiaping Qiu, 2012. "Managerial Attributes and Executive Compensation," Review of Financial Studies, Society for Financial Studies, vol. 25(1), pages 144-186.
    40. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
    41. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 169-182.
    42. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    43. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. "Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
    44. Paul Sullivan, & Ted To, 2013. "Job Dispersion and Compensating Wage Differentials," Working Papers 469, U.S. Bureau of Labor Statistics.
    45. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    46. Kaustia, Markku & Rantala, Ville, 2015. "Social learning and corporate peer effects," Journal of Financial Economics, Elsevier, vol. 117(3), pages 653-669.
    47. Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring.
    48. Peter MacKay & Gordon M. Phillips, 2005. "How Does Industry Affect Firm Financial Structure?," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1433-1466.
    49. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
    50. Faulkender, Michael & Yang, Jun, 2010. "Inside the black box: The role and composition of compensation peer groups," Journal of Financial Economics, Elsevier, vol. 96(2), pages 257-270, May.
    51. Kabir, Rezaul & Li, Hao & Veld-Merkoulova, Yulia V., 2013. "Executive compensation and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2893-2907.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kick, Thomas & Nehring, Inge & Schertler, Andrea, 2017. "Do all new brooms sweep clean? Evidence for outside bank appointments," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 135-151.
    2. Utsav Pandey & Sanjeet Singh, 2022. "Data envelopment analysis in hierarchical category structure with fuzzy boundaries," Annals of Operations Research, Springer, vol. 315(2), pages 1517-1549, August.
    3. Do, Truc & Zhang, Huai & Zuo, Luo, 2022. "Rocking the boat: How relative performance evaluation affects corporate risk taking," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    4. Phan, Dinh Hoang Bach & Tran, Vuong Thao & Nguyen, Dat Thanh & Le, Anh, 2020. "The importance of managerial ability on crude oil price uncertainty-firm performance relationship," Energy Economics, Elsevier, vol. 88(C).
    5. Hagendorff, Jens & Saunders, Anthony & Steffen, Sascha & Vallascas, Francesco, 2021. "The wolves of Wall Street? Managerial attributes and bank risk," Journal of Financial Intermediation, Elsevier, vol. 47(C).
    6. Chen, Sheng-Syan & Lin, Chih-Yen, 2018. "Managerial ability and acquirer returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 171-182.
    7. Lin, Yongjia & Fan, Di & Shi, Xuanyi & Fu, Maggie, 2021. "The effects of supply chain diversification during the COVID-19 crisis: Evidence from Chinese manufacturers," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 155(C).
    8. Francis, Bill B. & Hasan, Iftekhar & Kostova, Gergana L., 2016. "When do peers matter?: A cross-country perspective," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 364-389.
    9. Do, Hung X. & Nguyen, Lily & Nguyen, Nhut H. & Nguyen, Quan M.P., 2022. "LGBT policy, investor trading behavior, and return comovement," Journal of Economic Behavior & Organization, Elsevier, vol. 196(C), pages 457-483.
    10. Ajirloo, Bahman Fathi & Switzer, Lorne N., 2022. "Self-disclosed peer effects on corporate capital structure," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    11. Song, Xinyu & Yang, Baochen, 2022. "Oil price uncertainty, corporate governance and firm performance," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 469-487.
    12. Naaraayanan, S. Lakshmi & Nielsen, Kasper Meisner, 2021. "Does personal liability deter individuals from serving as independent directors?," Journal of Financial Economics, Elsevier, vol. 140(2), pages 621-643.
    13. Xu, Jing, 2022. "Competition and equilibrium effort choice," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    14. Kaijuan Gao & Chenglong Wang & Qi Su & Hanxiao Shen, 2020. "Do analysts follow firms with able managers?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(8), pages 1602-1612, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Albuquerque, Ana M. & De Franco, Gus & Verdi, Rodrigo S., 2013. "Peer choice in CEO compensation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 160-181.
    2. Tor‐Erik Bakke & Hamed Mahmudi & Ashley Newton, 2020. "Performance peer groups in CEO compensation contracts," Financial Management, Financial Management Association International, vol. 49(4), pages 997-1027, December.
    3. Do, Truc & Zhang, Huai & Zuo, Luo, 2022. "Rocking the boat: How relative performance evaluation affects corporate risk taking," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    4. Fich, Eliezer M. & Starks, Laura T. & Yore, Adam S., 2014. "CEO deal-making activities and compensation," Journal of Financial Economics, Elsevier, vol. 114(3), pages 471-492.
    5. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    6. Francis, Bill B. & Hasan, Iftekhar & John, Kose & Waisman, Maya, 2016. "Urban Agglomeration and CEO Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(6), pages 1925-1953, December.
    7. Kubick, Thomas R. & Lockhart, G. Brandon, 2016. "Do external labor market incentives motivate CEOs to adopt more aggressive corporate tax reporting preferences?," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 255-277.
    8. James, Hui L. & Benson, Bradley W. & Park, Jung Chul, 2020. "CEO fixed effects and inside debt compensation," Journal of Business Research, Elsevier, vol. 117(C), pages 71-86.
    9. Stacey Beaumont & Raluca Ratiu & David Reeb & Glenn Boyle & Philip Brown & Alexander Szimayer & Raymond Silva Rosa & David Hillier & Patrick McColgan & Athanasios Tsekeris & Bryan Howieson & Zoltan Ma, 2016. "Comments on Shan and Walter: ‘Towards a Set of Design Principles for Executive Compensation Contracts’," Abacus, Accounting Foundation, University of Sydney, vol. 52(4), pages 685-771, December.
    10. Canil, Jean & Karpavičius, Sigitas, 2020. "Compensation consultants: Does reputation matter?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    11. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883.
    12. Gao, Huasheng & Luo, Juan & Tang, Tilan, 2015. "Effects of managerial labor market on executive compensation: Evidence from job-hopping," Journal of Accounting and Economics, Elsevier, vol. 59(2), pages 203-220.
    13. Cziraki, Peter & Jenter, Dirk, 2021. "The Market for CEOs," CEPR Discussion Papers 16281, C.E.P.R. Discussion Papers.
    14. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics," Introductory Chapters, in: Robert Gibbons & John Roberts (ed.),The Handbook of Organizational Economics, Princeton University Press.
    15. Michelle L. Zorn & Christine Shropshire & John A. Martin & James G. Combs & David J. Ketchen Jr., 2017. "Home Alone: The Effects of Lone-Insider Boards on CEO Pay, Financial Misconduct, and Firm Performance," Strategic Management Journal, Wiley Blackwell, vol. 38(13), pages 2623-2646, December.
    16. Oyer, Paul & Schaefer, Scott, 2011. "Personnel Economics: Hiring and Incentives," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 20, pages 1769-1823, Elsevier.
    17. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
    18. Budsaratragoon, Pornanong & Lhaopadchan, Suntharee & Thomsen, Steen, 2020. "Community and compensation: Director remuneration in Thailand," Research in International Business and Finance, Elsevier, vol. 52(C).
    19. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    20. Kelvin K. F. Law & Lillian F. Mills, 2017. "Military experience and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 22(1), pages 141-184, March.
    21. El Diri, Malek & Lambrinoudakis, Costas & Alhadab, Mohammad, 2020. "Corporate governance and earnings management in concentrated markets," Journal of Business Research, Elsevier, vol. 108(C), pages 291-306.

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bof:bofrdp:2016_006. 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: . General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Minna Nyman (email available below). General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.