Disclosure biases in proxy performance graphs

Purpose - The purpose of this paper is to investigate whether proxy statement performance graph disclosures are influenced by the firm's governance structure and management concerns about relative performance. Design/methodology/approach - Logistic regression is used to test whether the level of performance graph disclosure decreases with lower relative performance and higher insider director membership on the compensation committee of the board. Also,Zandt‐statistics test whether bias in the selected peer group benchmark is related to insider membership on the committee. Findings - The empirical results suggest that reporting discretion was exercised for management's benefit. The amount of explicit disclosure on cumulative returns in the performance graph decreases as relative performance declines and decreases when insider directors serve on the compensation committee. Moreover, the presence of insider directors on the compensation committee is associated with a biased choice of peer group benchmark return. Research limitations/implications - The sample for the study consists of 141 large firms. Future research could examine a larger group of firms that vary in size or other disclosures. Practical implications - These findings support recent actions taken to improve corporate governance. Further public policy steps could be taken. For example, the SEC could require firms to include an explanation for appointing insiders to the compensation committee. Originality/value - The results are consistent with managers using discretion over information disclosures and suggest that compensation committees with insider members play a less active role in providing information that is helpful to shareholders.