Rocking the boat: How relative performance evaluation affects corporate risk taking

Truc Do, Huai Zhang and Luo Zuo

Journal of Accounting and Economics, 2022, vol. 73, issue 1

Abstract: We argue that relative performance evaluation (RPE) contracts introduce a tournament among the focal firm and peer firms. We test whether a firm's riskiness is altered by its CEO's incentive to win the tournament. We find that a firm that performed poorly relative to its peers during an interim period takes more risk in the remainder of the evaluation period than a firm with better interim performance. This effect is stronger when the interim assessment date is closer to the end of the evaluation period and when winning the competition is more important to the CEO. Together, our results suggest that RPE contracts create tournament incentives for CEOs and significantly affect corporate risk taking.

Keywords: Relative performance evaluation; Tournament incentives; Interim performance; Risk taking (search for similar items in EconPapers)
JEL-codes: G30 J33 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:73:y:2022:i:1:s0165410121000409

DOI: 10.1016/j.jacceco.2021.101425

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