Publication Type
Journal Article
Version
acceptedVersion
Publication Date
8-2018
Abstract
There is a standard trade-off in contracts between the provision of incentives and insurance. We hypothesize that this trade-off influences the precision with which firm performance is measured. We find that firm outcomes are measured less precisely when chance plays a large role in these outcomes. Further, this precision is determined through the choice of shares outstanding. This has several novel implications. Nominal stock prices can remain constant over time, and firms with unpredictable cash flows should have more shares and lower stock price levels, all else equal. We find evidence consistent with these implications.
Keywords
Compensation, performance benchmarks, stock splits
Discipline
Corporate Finance | Finance and Financial Management
Research Areas
Finance
Publication
Journal of Financial and Quantitative Analysis
Volume
53
Issue
4
First Page
1911
Last Page
1935
ISSN
0022-1090
Identifier
10.1017/S0022109018000303
Publisher
Cambridge University Press (CUP): HSS Journals
Citation
CRANE, Alan D.; KOCH, Andrew; and WEI, Chi Shen.
Choosing the precision of performance metrics. (2018). Journal of Financial and Quantitative Analysis. 53, (4), 1911-1935.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/5876
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1017/S0022109018000303