Relative Performance Evaluation, Sabotage, and Disclosure

Abstract

Many firms use relative stock performance to evaluate and incentivize their CEOs. We provide evidence that these firms routinely disclose information that harms peers’ stock prices. Consistent with deliberate sabotage, peer-harming disclosures appear to be aimed at the peers whose stock price depressions are more likely to benefit the CEO, especially towards the end of a fiscal year. These patterns do not appear to be the result of passive information spillovers. Instead, firms appear to alter the information content of their disclosures, making their voluntary disclosures more informative about targeted peers, and less informative about themselves. The negative pricing impacts of peer-harming disclosures do not reverse, suggesting that these disclosures contain legitimate information content regarding peers’ prospects. Collectively, our findings provide the first clear evidence that relative performance evaluation in CEO pay plans leads to inter-firm sabotage—a notion which had been deemed “unlikely” by prior literature.