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Relative performance evaluation and investment efficiency

Author

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  • Liao, Guanmin
  • Wang, Jiajing
  • Xue, Jing

Abstract

We investigate the impact of incorporating relative performance targets in long-term equity plans on investment efficiency in China. Using data on 1642 long-term equity incentive plans implemented in 1186 Chinese listed companies from 2001 to 2020, we find that the reduction in inefficient investments after the equity grant is higher for RPE (relative performance evaluation) firms than non-RPE firms. We establish a direct connection between the improved investment efficiency and RPE by assessing the essential conditions and implementation extent of RPE in equity plans. Our findings remain robust after addressing concerns related to endogeneity, potential confounding effects from the simultaneous use of absolute performance evaluation and sample selection bias. Collectively, our analyses demonstrate that benchmarking firms' performance against industry peers through RPE encourages more efficient allocation of investment resources.

Suggested Citation

  • Liao, Guanmin & Wang, Jiajing & Xue, Jing, 2024. "Relative performance evaluation and investment efficiency," Pacific-Basin Finance Journal, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x2400012x
    DOI: 10.1016/j.pacfin.2024.102261
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    More about this item

    Keywords

    Investment efficiency; Relative performance evaluation; Compensation;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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