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Disclosure costs of relative performance evaluation

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  • Martin, Melissa
  • Timmermans, Oscar

Abstract

Relative performance evaluation has become an increasingly common component of executive compensation contracts. We study how these incentive plans relate to corporate disclosure and predict that they introduce an incremental disclosure cost. This cost arises because disclosures can help competitors make better investment decisions, enhancing their performance and thereby reducing managers’ expected compensation. Consistent with this prediction, we find a negative association between relative performance plans and voluntary, value-relevant management forecasts, alongside a positive association with redactions in mandatory filings. This pattern is specific to plans with accounting-based metrics and absent for plans with price-based metrics. The results for price-based metrics are consistent with the idea that the incentive to reduce information asymmetry with market participants outweighs disclosure costs in these plans. The results for accounting-based metrics are more pronounced for managers whose plans provide stronger incentives and for those whose forecasts provide meaningful information spillovers to peers. Overall, this paper contributes the idea that relative performance plans can impose disclosure costs, thereby shedding light on contracting mechanisms that discourage disclosure—a less well-understood aspect of disclosure research.

Suggested Citation

  • Martin, Melissa & Timmermans, Oscar, 2025. "Disclosure costs of relative performance evaluation," LSE Research Online Documents on Economics 127506, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:127506
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    File URL: http://eprints.lse.ac.uk/127506/
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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