Growth options and relative performance evaluation

Jianhui Huang, Ling Liu and Ingrid C. Ulstad

International Journal of Accounting & Information Management, 2016, vol. 24, issue 1, 38-55

Abstract: Purpose - – The purpose of this study is to investigate the cross-sectional associations between growth options and the peer pay–performance sensitivity of CEO compensation. Design/methodology/approach - – This study includes analytical analysis and multivariable regression analysis. Findings - – It is predicted in this study that there is a non-linear concave relation between peer pay–performance sensitivity and a firm’s growth options. Results based on the executive compensation data from ExecuComp are consistent with the hypothesis presented in this study. Research limitations/implications - – Future scholars need to consider the non-linear impact of growth options on peer pay–performance sensitivity when they conduct research related to CEO compensation by differentiating the company’s growth options to be at a low, medium and high level. In an industry, when a compensation committee decides on the peers for performance comparison purposes, the committee needs to make sure that the peer firms they select have similar operational environments, for example, they face similar growth options (e.g. low, medium or high) and idiosyncratic variances. Practical implications - – This study contributes to the managerial compensation literature by revealing the important role growth options, as well as idiosyncratic variances, play on peer pay–performance sensitivity. The results of this study have implications for both future researchers as well as industrial practitioners. Social implications - – It gives guidance on designing CEO compensation contracts. Originality/value - – This is an original work from the coauthors listed on this study.

Keywords: Relative performance evaluation; Growth options; Idiosyncratic variance; Non-linear relation (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijaimp:v:24:y:2016:i:1:p:38-55

DOI: 10.1108/IJAIM-10-2014-0067

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