CEOs’ outside opportunities and relative performance evaluation: evidence from a natural experiment

Ke Na

Journal of Financial Economics, 2020, vol. 137, issue 3, 679-700

Abstract: This paper examines the effect of CEOs’ outside opportunities on the use of relative performance evaluation (RPE) in CEO compensation. My tests exploit the staggered rejection of the Inevitable Disclosure Doctrine (IDD) by US state courts as an exogenous increase in CEOs’ outside opportunities. I find that the rejection of the IDD leads to a significant increase in the sensitivity of CEO pay to systematic performance (less RPE). This increase is more pronounced for CEOs with greater labor market mobility and industries where proprietary information is more important and not related to measures of governance quality. These results suggest that firms link CEO pay to systematic performance to retain talent and ensure participation.

Keywords: Relative performance evaluation; CEO compensation; CEO labor market (search for similar items in EconPapers)
JEL-codes: G3 J33 M12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:137:y:2020:i:3:p:679-700

DOI: 10.1016/j.jfineco.2020.03.007

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