Exchange Rate Risk and Relative Performance Evaluation

Bing Chen (), Wei Chen and Xiaohui Yang
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Bing Chen: Department of Accounting, Wenzhou-Kean University, Wenzhou 325060, China
Wei Chen: Department of Accounting, University of Connecticut, Storrs, CT 06269, USA
Xiaohui Yang: Department of Finance, Fairleigh Dickinson University, Teaneck, NJ 07666, USA

JRFM, 2025, vol. 18, issue 6, 1-17

Abstract: The relative performance evaluation (RPE) hypothesis posits that executive compensation should not be influenced by uncontrollable exogenous shocks. However, prior studies often find limited empirical support for this hypothesis, partly because identifying peers exposed to the same exogenous shocks is challenging. We propose a new method for identifying peers and testing the RPE hypothesis within the context of exchange rate risk. Specifically, we select peers based on the sensitivity of their stock returns to exchange rate fluctuations. We find evidence that firms respond to significant exchange rate movements by ex post adjusting their peer selection to include peers with similar exchange rate risk exposure. Furthermore, after accounting for ex post peer group adjustments, we find much stronger support for the RPE hypothesis than prior studies.

Keywords: relative performance evaluation; compensation; exchange rate fluctuation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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