Relative peer quality and firm performance

Bill Francis, Iftekhar Hasan, Sureshbabu Mani and Pengfei Ye

Journal of Financial Economics, 2016, vol. 122, issue 1, 196-219

Abstract: We examine the performance impact of the relative quality of a Chief Executive Officer (CEO)’s compensation peers (peers to determine a CEO's overall compensation) and bonus peers (peers 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 earn higher stock returns and experience higher profitability growth than firms with lower RPQ. Learning among peers and the increased incentive to work harder induced by the peer-based tournament contribute to RPQ's performance effect.

Keywords: Relative peer quality; Firm performance; Tournament; Optimal contract (search for similar items in EconPapers)
JEL-codes: G30 M52 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:122:y:2016:i:1:p:196-219

DOI: 10.1016/j.jfineco.2016.06.002

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