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Review of Accounting Studies

, Volume 23, Issue 3, pp 1137–1176 | Cite as

Accounting comparability and relative performance evaluation in CEO compensation

  • Gerald J. Lobo
  • Michael Neel
  • Adrienne Rhodes
Article
  • 751 Downloads

Abstract

We investigate whether accounting comparability is associated with the likelihood that CEO compensation is tied to relative accounting performance (e.g., return on assets). We predict that higher accounting comparability increases the risk-sharing benefit of accounting-based RPE because peer firm performance better controls for common risk in RPE firm performance. Thus, firms that have higher accounting comparability with potential performance peers will be more likely to include accounting-based RPE as a component of the total CEO compensation contract. We find support for this prediction using (1) an explicit test design that relies on the ex ante terms of CEO compensation contracts obtained from proxy disclosures, and (2) an implicit design that relies on the actual realizations of CEO compensation. To provide further evidence, we examine the association between accounting comparability and the selection of performance peers when the CEO compensation contract includes an accounting-based RPE component. We find that higher comparability between the RPE firm and a potential peer firm increases (decreases) the potential peer firm’s likelihood of being selected into (dropped from) the peer group. Cross-sectional analyses show that this association is less pronounced, or not present, when the relative performance measure is price-based (as opposed to accounting-based), indicating that these results do not merely reflect a more general role of comparability in all RPE contracts.

Keywords

Accounting comparability Relative performance evaluation RPE Peer selection 

JEL Classification

M12 M41 

Notes

Acknowledgments

We gratefully acknowledge comments from Richard Sloan (the Editor), two anonymous referees, Anwer Ahmed, Gus De Franco, and Kiridaran Kanagaretnam. This work has benefited from the comments of workshop participants at Texas Tech University, the 2016 American Accounting Association Annual Meeting, and the 2014 Lone Star Accounting Research Conference. We thank Megan Grady for her research assistance.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Bauer College of BusinessUniversity of HoustonHoustonUSA
  2. 2.Mays Business SchoolTexas A&M UniversityCollege StationUSA

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