AAA Spark Meeting of Regions

Executive Relative Performance Evaluations and Financial Analyst Forecasting Behavior

• In Event: Strategic and Voluntary Disclosures

Abstract

We investigate the extent to which use of Relative Performance Evaluation (RPE) in the
compensation contracts of top management by firms in an analyst’s portfolio relates to the
analyst’s information costs as revealed through forecasting behavior. We find that an analyst
with a greater percentage of RPE-using firms in her portfolio maintains a smaller portfolio size,
consistent with RPE driving increased information costs. However, these analysts with a larger
percentage of RPE firms in their portfolio issue more accurate and timely earnings forecasts. We
also find that the improvement in forecast accuracy as a result of portfolio firms’ RPE use is
partially mediated by portfolio size, suggesting that while RPE use increases per-firm
information costs for the analyst, she manages to maintain her output quality through portfolio
size reduction. We also find that an analyst with more RPE-using firms in her portfolio issues
forecasts more frequently and with a lower positive bias. This study provides evidence
suggesting that firms’ use of RPE not only affects the per-firm information costs of financial
analyst but also affects the informational dynamics between analysts and the demand for
(responsive) analyst forecasts.

Authors

• Vic Lee, California State Polytechnic University, Pomona

• Danya Mi, Georgia State University

• James Robert Moon, Georgia Institute of Technology