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The optimal choice of a relative performance indicator in product market competition

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  • Hamamura, Jumpei
  • Hayakawa, Sho

Abstract

In this research, we analytically explore what performance indicator is optimal in a market competition when the firm’s owner compensates the CEO based on the relative performance evaluation. The relative performance evaluation considered in previous studies compares the firm’s profit with the competitor’s profit. However, when the firm evaluates the CEO’s performance, another performance indicator is often adopted instead of profit. As a result, we show that given specific economic conditions, the owners adopt sales as a relative performance indicator to evaluate the CEO’s performance. This result has some important implications for the research on relative performance evaluation. First, it will affect future studies showing that there are different possible choices of relative performance indicators in management accounting assuming product market competition. Second, our study has an important implication for empirical research on relative performance evaluation in management accounting, in which a relative performance indicator is adopted as an independent variable.

Suggested Citation

  • Hamamura, Jumpei & Hayakawa, Sho, 2019. "The optimal choice of a relative performance indicator in product market competition," MPRA Paper 93921, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:93921
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    File URL: https://mpra.ub.uni-muenchen.de/93921/1/MPRA_paper_93921.pdf
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    References listed on IDEAS

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    1. Ittner, CD & Larcker, DF, 1998. "Are nonfinancial measures leading indicators of financial performance? An analysis of customer satisfaction," Journal of Accounting Research, Wiley Blackwell, vol. 36, pages 1-35.
    2. Sung Wook Joh, 1999. "Strategic Managerial Incentive Compensation In Japan: Relative Performance Evaluation And Product Market Collusion," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 303-313, May.
    3. Fumas, Vicente Salas, 1992. "Relative performance evaluation of management : The effects on industrial competition and risk sharing," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 473-489, September.
    4. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 1999-2043, December.
    5. Robert Gibbons & Kevin J. Murphy, 1990. "Relative Performance Evaluation for Chief Executive Officers," ILR Review, Cornell University, ILR School, vol. 43(3), pages 30, April.
    6. Hamamura, Jumpei, 2019. "Unobservable transfer price exceeds marginal cost when the manager is evaluated using a balanced scorecard," Advances in accounting, Elsevier, vol. 44(C), pages 22-28.
    7. Antle, R & Smith, A, 1986. "An Empirical-Investigation Of The Relative Performance Evaluation Of Corporate-Executives," Journal of Accounting Research, Wiley Blackwell, vol. 24(1), pages 1-39.
    8. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563, Elsevier.
    9. Janakiraman, Sn & Lambert, Ra & Larcker, Df, 1992. "An Empirical-Investigation Of The Relative Performance Evaluation Hypothesis," Journal of Accounting Research, Wiley Blackwell, vol. 30(1), pages 53-69.
    10. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    11. Albuquerque, Ana, 2009. "Peer firms in relative performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 69-89, October.
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    Cited by:

    1. Jumpei Hamamura, 2021. "What level do disadvantaged firms weight rivals' profits in relative performance evaluations under quantity competition?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(2), pages 493-501, March.

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    More about this item

    Keywords

    Non-cooperative game theory; CEO compensation; Relative performance evaluation; Performance indicator; Quantity competition;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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