Problem definition: Motivated by a platelet inventory management problem, we study a fixed lifetime perishable inventory management problem under a general demand process. Determining an optimal ordering policy for perishable inventory systems is particularly challenging because of the well-known “curse of dimensionality.” Approximation policies with worst-case performance bounds have been developed in the literature for perishable inventory systems. However, using real data, we observe that the existing policies tend to underorder when the unit shortage penalty is high, which is an important concern for critical perishable products, such as lifesaving blood products. We seek to address this problem in this paper. Methodology/results: We present a new approximation policy for perishable inventory systems, which we call a truncated balancing (TB) policy. In particular, we first define a new balancing ordering quantity and prove a novel lower bound on the optimal ordering quantity. We then define our TB policy such that the maximum between the balancing ordering quantity and the lower bound is ordered at each period. We prove that when first in, first out is an optimal issuing policy, (1) our proposed TB policy admits a worst-case performance bound of two, and (2) it is asymptotically optimal when the unit shortage penalty goes to infinity. Finally, we present a calibrated numerical study based on real data from our partner hospital and show that our proposed policy performs significantly better than the existing policies in practical scenarios with reasonably high shortage penalties. Managerial implications: Our analysis offers managerial insights for perishable inventory management, especially for systems with an imbalance in underage and overage cost parameters. When the unit shortage penalty is high, simply balancing the underage and overage costs can lead to underordering, whereas our proposed policy effectively addresses this drawback. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0644 .
{"title":"Truncated Balancing Policy for Perishable Inventory Management: Combating High Shortage Penalties","authors":"Can Zhang, T. Ayer, Chelsea C. White","doi":"10.2139/ssrn.3469852","DOIUrl":"https://doi.org/10.2139/ssrn.3469852","url":null,"abstract":"Problem definition: Motivated by a platelet inventory management problem, we study a fixed lifetime perishable inventory management problem under a general demand process. Determining an optimal ordering policy for perishable inventory systems is particularly challenging because of the well-known “curse of dimensionality.” Approximation policies with worst-case performance bounds have been developed in the literature for perishable inventory systems. However, using real data, we observe that the existing policies tend to underorder when the unit shortage penalty is high, which is an important concern for critical perishable products, such as lifesaving blood products. We seek to address this problem in this paper. Methodology/results: We present a new approximation policy for perishable inventory systems, which we call a truncated balancing (TB) policy. In particular, we first define a new balancing ordering quantity and prove a novel lower bound on the optimal ordering quantity. We then define our TB policy such that the maximum between the balancing ordering quantity and the lower bound is ordered at each period. We prove that when first in, first out is an optimal issuing policy, (1) our proposed TB policy admits a worst-case performance bound of two, and (2) it is asymptotically optimal when the unit shortage penalty goes to infinity. Finally, we present a calibrated numerical study based on real data from our partner hospital and show that our proposed policy performs significantly better than the existing policies in practical scenarios with reasonably high shortage penalties. Managerial implications: Our analysis offers managerial insights for perishable inventory management, especially for systems with an imbalance in underage and overage cost parameters. When the unit shortage penalty is high, simply balancing the underage and overage costs can lead to underordering, whereas our proposed policy effectively addresses this drawback. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0644 .","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131077246","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Investors lacking good judgment may miscalculate the strategic motives causing withholding of material information. The resulting inadequate professional skepticism encourages excessively optimistic expectations after a non-disclosure and break the economic forces causing immediate unravelling to full disclosure. A regulator may intervene to correct the problem by mandating disclosure over events that would be otherwise be withheld; however, such paternalistic interventions come with a severe drawback: over-protection prevents investors from learning to be skeptical through repeated experiences of non-disclosure losses. While an unregulated market will converge over time to full disclosure, paternalism will lead to cycles characterized by high levels of compliance followed by excessive optimism. The model further predicts an association between positive price drift and transparency, and explains why regulators may sometimes choose to shut down entire markets.
{"title":"Disclosure Paternalism","authors":"J. Bertomeu","doi":"10.2139/ssrn.3901405","DOIUrl":"https://doi.org/10.2139/ssrn.3901405","url":null,"abstract":"Investors lacking good judgment may miscalculate the strategic motives causing withholding of material information. The resulting inadequate professional skepticism encourages excessively optimistic expectations after a non-disclosure and break the economic forces causing immediate unravelling to full disclosure. A regulator may intervene to correct the problem by mandating disclosure over events that would be otherwise be withheld; however, such paternalistic interventions come with a severe drawback: over-protection prevents investors from learning to be skeptical through repeated experiences of non-disclosure losses. While an unregulated market will converge over time to full disclosure, paternalism will lead to cycles characterized by high levels of compliance followed by excessive optimism. The model further predicts an association between positive price drift and transparency, and explains why regulators may sometimes choose to shut down entire markets.","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133089035","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jonathan Black, Charles (Chad) Ham, Michael D. Kimbrough, Ha Yoon Yee
Firms face a greater risk of lawsuits for overstated rather than understated earnings or net assets, suggesting conservatism can reduce firms’ expected legal costs. Because managers with legal expertise are more likely than other managers to recognize the legal benefits of conservatism, this study examines whether legal expertise among members of senior management promotes greater conservatism. Consistent with this prediction, we find that firms with a general counsel (GC) in senior management (our proxy for legal expertise) report more conservatively. We also find that GC firms recalibrate their conservatism levels in response to changes in the legal environment—their conservatism choices are more responsive to litigation against peer firms and to two judicial rulings that affected the litigation risk for firms located in the Ninth Circuit. Overall, our findings suggest that populating senior management with legal experts affects the extent to which a firm’s level of conservatism incorporates legal risks.
{"title":"Legal Expertise and the Role of Litigation Risk in Firms’ Conservatism Choices","authors":"Jonathan Black, Charles (Chad) Ham, Michael D. Kimbrough, Ha Yoon Yee","doi":"10.2139/ssrn.3224887","DOIUrl":"https://doi.org/10.2139/ssrn.3224887","url":null,"abstract":"Firms face a greater risk of lawsuits for overstated rather than understated earnings or net assets, suggesting conservatism can reduce firms’ expected legal costs. Because managers with legal expertise are more likely than other managers to recognize the legal benefits of conservatism, this study examines whether legal expertise among members of senior management promotes greater conservatism. Consistent with this prediction, we find that firms with a general counsel (GC) in senior management (our proxy for legal expertise) report more conservatively. We also find that GC firms recalibrate their conservatism levels in response to changes in the legal environment—their conservatism choices are more responsive to litigation against peer firms and to two judicial rulings that affected the litigation risk for firms located in the Ninth Circuit. Overall, our findings suggest that populating senior management with legal experts affects the extent to which a firm’s level of conservatism incorporates legal risks.","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125791062","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Markus Diller, Johannes Lorenz, Georg Schneider, Caren Sureth-Sloane
This study investigates how strategic tax transfer pricing of a multinational company (MNC) and two tax authorities in different countries affects production and tax avoidance decisions at the firm level and tax revenues at the country level. We employ a game-theoretical model to analyze the costs and benefits of two tax transfer pricing regimes (consistency vs. inconsistency) under asymmetric information. Though tax transfer pricing harmonization is considered a promising instrument to fight undesired tax avoidance, the implications are largely unclear. We find tax avoidance in equilibrium in both countries under inconsistency. Surprisingly, we identify conditions under which low-tax countries benefit from consistency while high-tax countries benefit from inconsistency. This explains how the strategic interaction of taxpayer and tax authorities under firm-level heterogeneity challenges the implementation of consistent regimes. Understanding the implications of (in)consistent transfer pricing rules is crucial when reforming transfer pricing regulations to fight tax avoidance and double taxation.
{"title":"Is Consistency the Panacea? Inconsistent or Consistent Tax Transfer Prices with Strategic Taxpayer and Tax Authority Behavior","authors":"Markus Diller, Johannes Lorenz, Georg Schneider, Caren Sureth-Sloane","doi":"10.2139/ssrn.3895611","DOIUrl":"https://doi.org/10.2139/ssrn.3895611","url":null,"abstract":"This study investigates how strategic tax transfer pricing of a multinational company (MNC) and two tax authorities in different countries affects production and tax avoidance decisions at the firm level and tax revenues at the country level. We employ a game-theoretical model to analyze the costs and benefits of two tax transfer pricing regimes (consistency vs. inconsistency) under asymmetric information. Though tax transfer pricing harmonization is considered a promising instrument to fight undesired tax avoidance, the implications are largely unclear. We find tax avoidance in equilibrium in both countries under inconsistency. Surprisingly, we identify conditions under which low-tax countries benefit from consistency while high-tax countries benefit from inconsistency. This explains how the strategic interaction of taxpayer and tax authorities under firm-level heterogeneity challenges the implementation of consistent regimes. Understanding the implications of (in)consistent transfer pricing rules is crucial when reforming transfer pricing regulations to fight tax avoidance and double taxation.","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132351133","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the informational role of governments in the private sector in emerging economies. Using a large sample of private firms, we show that governments’ ability and willingness to collect and disseminate economic information (government transparency) is positively associated with firm-level operational efficiency and access to external financing. Several cross-sectional analyses corroborate our main findings. We find that the effect of government transparency is stronger for firms operating in weaker alternative information environments. We also find a reduced effect of government transparency in countries with better-developed capital markets that facilitate capital allocation and production efficiency. Additional analyses using the World Bank-supported Open Government Data initiative as a staggered shock to government transparency provides further support to our primary results. Overall, our paper sheds light on the important role played by governments in emerging markets in aggregating and disseminating economic information.
{"title":"Government Transparency and Firm-Level Operational Efficiency","authors":"Ole‐Kristian Hope, Shushu Jiang, Dushyantkumar Vyas","doi":"10.2139/ssrn.3888753","DOIUrl":"https://doi.org/10.2139/ssrn.3888753","url":null,"abstract":"We examine the informational role of governments in the private sector in emerging economies. Using a large sample of private firms, we show that governments’ ability and willingness to collect and disseminate economic information (government transparency) is positively associated with firm-level operational efficiency and access to external financing. Several cross-sectional analyses corroborate our main findings. We find that the effect of government transparency is stronger for firms operating in weaker alternative information environments. We also find a reduced effect of government transparency in countries with better-developed capital markets that facilitate capital allocation and production efficiency. Additional analyses using the World Bank-supported Open Government Data initiative as a staggered shock to government transparency provides further support to our primary results. Overall, our paper sheds light on the important role played by governments in emerging markets in aggregating and disseminating economic information.","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130554487","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Omri Even-Tov, Xinlei Li, H. Wang, Christopher D. Williams
We examine the significance and uniqueness of individual-pair relationships cultivated through repeated loan interactions. Using a hand-collected dataset compiled of borrowing manager and loan officer information, we find that individual-pair relationship loans are associated with a cost-of-debt reduction of between seven to 13 basis points. We also document that the relationship has an economic impact even when other affiliations, for example, institutional pairs, social ties, cultural proximity, and gender, are considered. Individual-pair relationships matter because they furnish lenders with useful soft information, especially when the firm has a poor hard information environment or when the bank and loan officer rely less on hard information. In addition, we find that individual-pair relationship loans have fewer rating downgrades, suggesting that accumulated soft information leads to better loan quality. Collectively, our results highlight the unique value of sustained professional engagement between two individuals in the lending process.
{"title":"The Importance of Individual-Pair Lending Relationships","authors":"Omri Even-Tov, Xinlei Li, H. Wang, Christopher D. Williams","doi":"10.2139/ssrn.3877687","DOIUrl":"https://doi.org/10.2139/ssrn.3877687","url":null,"abstract":"We examine the significance and uniqueness of individual-pair relationships cultivated through repeated loan interactions. Using a hand-collected dataset compiled of borrowing manager and loan officer information, we find that individual-pair relationship loans are associated with a cost-of-debt reduction of between seven to 13 basis points. We also document that the relationship has an economic impact even when other affiliations, for example, institutional pairs, social ties, cultural proximity, and gender, are considered. Individual-pair relationships matter because they furnish lenders with useful soft information, especially when the firm has a poor hard information environment or when the bank and loan officer rely less on hard information. In addition, we find that individual-pair relationship loans have fewer rating downgrades, suggesting that accumulated soft information leads to better loan quality. Collectively, our results highlight the unique value of sustained professional engagement between two individuals in the lending process.","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116501214","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This handbook provides the first systematic attempt to generate a framework and industry-specific models for the measurement of impacts on customers and the environment from use of products and services, in monetary terms, that can then be reflected in financial statements with the purpose of creating impact-weighted financial accounts. Chapter 1 introduces product impact measurement. Chapter 2 outlines efforts to measure product impact. Chapter 3 describes our product impact measurement framework with an emphasis on the choice of design principles, process for building the framework, identification of relevant dimensions, range of measurement bases and the use of relative versus absolute benchmarks. Chapters 4 to 12 outline models for impact measurement in nine industries of the economy. Chapter 13 describes an analysis of an initial dataset of companies across the nine industries that we applied our models and constructed product impact measurements. Chapter 14 provides a preliminary discussion of the accounting treatment of product impact estimates within impact-weighted accounts. Our overall conclusion is that the measurement of product impact is feasible, scalable and generates important insights for the competitive positioning and strategy of organizations.
{"title":"Impact Accounting for Product Use: A Framework and Industry-specific Models","authors":"George Serafeim, Katie Trinh","doi":"10.2139/ssrn.3877521","DOIUrl":"https://doi.org/10.2139/ssrn.3877521","url":null,"abstract":"This handbook provides the first systematic attempt to generate a framework and industry-specific models for the measurement of impacts on customers and the environment from use of products and services, in monetary terms, that can then be reflected in financial statements with the purpose of creating impact-weighted financial accounts. Chapter 1 introduces product impact measurement. Chapter 2 outlines efforts to measure product impact. Chapter 3 describes our product impact measurement framework with an emphasis on the choice of design principles, process for building the framework, identification of relevant dimensions, range of measurement bases and the use of relative versus absolute benchmarks. Chapters 4 to 12 outline models for impact measurement in nine industries of the economy. Chapter 13 describes an analysis of an initial dataset of companies across the nine industries that we applied our models and constructed product impact measurements. Chapter 14 provides a preliminary discussion of the accounting treatment of product impact estimates within impact-weighted accounts. Our overall conclusion is that the measurement of product impact is feasible, scalable and generates important insights for the competitive positioning and strategy of organizations.","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123467423","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the 2017 UK rule requiring firms that employ more than 250 workers to publicly disclose gender pay gap data. We focus on two questions of interest to regulators and socially conscious investors: (i) does gender pay equity improve after mandatory disclosure? and (ii) is gender pay equity useful to investors in predicting future operating performance, stock returns, and Tobin’s Q? We find a 0.41% reduction in the gender pay gap after the implementation of gender pay gap reporting only in entities with between 250 and 499 employees but no change for entities with 500+ employees. Only 9% of these entities belong to publicly listed firms. Further analysis suggests a modest one-time levelling up in the gender pay gap, in anticipation of the rule, in the two-year period between when the rule was announced and when it went into effect (but no subsequent improvement). We also find a link between Employment Tribunal settlements – most commonly resulting from unfair dismissal cases brought by employees – and lower gender pay gaps, suggesting a potential unintended adverse consequence of the regulation. There is no robust association between gender pay gaps and ROA (return on assets), EBITDA, operating margins, and stock returns. We conclude that (i) the impact of the rule thus far is modest at best, and at worst may have had unintended consequences for existing employees; and (ii) the evidence linking gender pay inequity to firm value or operating performance is scant.
{"title":"Mandatory Gender Pay Gap Disclosure in the UK: Did Inequity Fall and Do these Disclosures Affect Firm Value?","authors":"Aneesh Raghunandan, Shivaram Rajgopal","doi":"10.2139/ssrn.3865689","DOIUrl":"https://doi.org/10.2139/ssrn.3865689","url":null,"abstract":"We study the 2017 UK rule requiring firms that employ more than 250 workers to publicly disclose gender pay gap data. We focus on two questions of interest to regulators and socially conscious investors: (i) does gender pay equity improve after mandatory disclosure? and (ii) is gender pay equity useful to investors in predicting future operating performance, stock returns, and Tobin’s Q? We find a 0.41% reduction in the gender pay gap after the implementation of gender pay gap reporting only in entities with between 250 and 499 employees but no change for entities with 500+ employees. Only 9% of these entities belong to publicly listed firms. Further analysis suggests a modest one-time levelling up in the gender pay gap, in anticipation of the rule, in the two-year period between when the rule was announced and when it went into effect (but no subsequent improvement). We also find a link between Employment Tribunal settlements – most commonly resulting from unfair dismissal cases brought by employees – and lower gender pay gaps, suggesting a potential unintended adverse consequence of the regulation. There is no robust association between gender pay gaps and ROA (return on assets), EBITDA, operating margins, and stock returns. We conclude that (i) the impact of the rule thus far is modest at best, and at worst may have had unintended consequences for existing employees; and (ii) the evidence linking gender pay inequity to firm value or operating performance is scant.","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-06-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115312484","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Accountancy is the intrgreal part of the economy.Economy can be devloped with the use of better art of Accountancy.
会计是经济不可分割的一部分。运用更好的会计技术可以促进经济的发展。
{"title":"Accountancy with historical and Professional perspective.","authors":"Dr. Iqbal Shaukat","doi":"10.2139/ssrn.3856466","DOIUrl":"https://doi.org/10.2139/ssrn.3856466","url":null,"abstract":"Accountancy is the intrgreal part of the economy.Economy can be devloped with the use of better art of Accountancy.","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-05-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133573981","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop an algorithm that mimics the relative performance evaluation (“RPE”) peer selection process used for CEOs’ incentive plans. Our algorithm constructs the portfolio of peer firms that exhibits the highest in-sample stock performance correlation with the focal firm, which we then use as a counterfactual to better understand firms’ actual RPE choices. We find that most firms use RPE in a manner consistent with optimal risk-sharing; firms are more likely to use RPE when a viable peer group is available, and they construct peer groups that are about as effective as possible at shielding CEOs from outcome risk. However, some firms choose not to use RPE even when an effective peer group is available; non-reliance on RPE in these cases appears to be related to competitive sabotage concerns. Other firms choose to use RPE, but benchmark against a peer group that is not effective from a risk-sharing perspective; reliance on RPE in these cases appears to be related to rent-extraction. Collectively, our study improves the understanding of firms’ ex ante ability to construct an effective peer group, and thereby sheds new light on why firms do—and perhaps more importantly, why some firms do not—use relative performance evaluation in their CEOs’ incentive plans.
{"title":"Relative Performance Evaluation and the Peer Group Opportunity Set","authors":"Matthew J. Bloomfield, W. Guay, Oscar Timmermans","doi":"10.2139/ssrn.3853940","DOIUrl":"https://doi.org/10.2139/ssrn.3853940","url":null,"abstract":"We develop an algorithm that mimics the relative performance evaluation (“RPE”) peer selection process used for CEOs’ incentive plans. Our algorithm constructs the portfolio of peer firms that exhibits the highest in-sample stock performance correlation with the focal firm, which we then use as a counterfactual to better understand firms’ actual RPE choices. We find that most firms use RPE in a manner consistent with optimal risk-sharing; firms are more likely to use RPE when a viable peer group is available, and they construct peer groups that are about as effective as possible at shielding CEOs from outcome risk. However, some firms choose not to use RPE even when an effective peer group is available; non-reliance on RPE in these cases appears to be related to competitive sabotage concerns. Other firms choose to use RPE, but benchmark against a peer group that is not effective from a risk-sharing perspective; reliance on RPE in these cases appears to be related to rent-extraction. Collectively, our study improves the understanding of firms’ ex ante ability to construct an effective peer group, and thereby sheds new light on why firms do—and perhaps more importantly, why some firms do not—use relative performance evaluation in their CEOs’ incentive plans.","PeriodicalId":357263,"journal":{"name":"Managerial Accounting eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-05-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130627782","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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