Choosing the Precision of Performance Metrics

Alan D. Crane, Andrew Koch, Chishen Wei

Research output: Journal article publicationJournal articleAcademic researchpeer-review

Abstract

There is a standard trade-off in compensation 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.

Original languageEnglish
Pages (from-to)1911-1935
Number of pages25
JournalJournal of Financial and Quantitative Analysis
Volume53
Issue number4
DOIs
Publication statusPublished - 1 Aug 2018
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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