Disclosure costs of relative performance evaluation

Martin, Melissa and Timmermans, Oscar ORCID: 0000-0003-2220-0057 (2025) Disclosure costs of relative performance evaluation. Management Science. ISSN 0025-1909 (In Press)

Text (MT - March 2025) - Accepted Version Pending embargo until 1 January 2100. Available under License Creative Commons Attribution. Download (757kB)

Abstract

Relative performance evaluation has become an increasingly common component of executive compensation contracts. We study how these incentive plans relate to corporate disclosure and predict that they introduce an incremental disclosure cost. This cost arises because disclosures can help competitors make better investment decisions, enhancing their performance and thereby reducing managers’ expected compensation. Consistent with this prediction, we find a negative association between relative performance plans and voluntary, value-relevant management forecasts, alongside a positive association with redactions in mandatory filings. This pattern is specific to plans with accounting-based metrics and absent for plans with price-based metrics. The results for price-based metrics are consistent with the idea that the incentive to reduce information asymmetry with market participants outweighs disclosure costs in these plans. The results for accounting-based metrics are more pronounced for managers whose plans provide stronger incentives and for those whose forecasts provide meaningful information spillovers to peers. Overall, this paper contributes the idea that relative performance plans can impose disclosure costs, thereby shedding light on contracting mechanisms that discourage disclosure—a less well-understood aspect of disclosure research.

Item Type:	Article
Additional Information:	© 2025
Divisions:	Accounting
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L10 - General M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M12 - Personnel Management
Date Deposited:	05 Mar 2025 11:48
Last Modified:	05 Mar 2025 11:49
URI:	http://eprints.lse.ac.uk/id/eprint/127506

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