Management Accounting Section Midyear Meeting

Product Market Competition and Relative Performance Evaluation: Evidence from a Quasi-Natural Experiment

• In Event: Break/Research Exhibition 2: Performance Measurement and Control Systems

Abstract

I provide causal evidence that product market competition reduces use of relative performance evaluation (RPE). Prior studies regarding the relation between product market competition and RPE have reached mixed theoretical and empirical findings. Agency theory predicts that RPE is used more in highly competitive environment to improve contract efficiency. Industrial organization theory suggests that positive (negative) pay-for-peer-performance sensitivity can be used to discourage (encourage) competition for strategic purposes. I supplement prior studies by finding that (1) naïve OLS regressions using a different proxy for firm-level product market competition yield a positive effect of competition on RPE, but (2) a difference-in-differences approach reverses the sign of this effect, suggesting that firms are less (more) likely to use RPE in response to competition shocks induced by major industry-level tariff reduction (increase).

Author

• Zhe Michael Guo, Boston University