Review of Accounting Studies

, Volume 6, Issue 1, pp 77–108 | Cite as

Renegotiation and Relative Performance Evaluation: Why an Informative Signal May Be Useless

Abstract

Although Holmström's informativeness criterionprovides a theoretical foundation for the controllability principleand interfirm relative performance evaluation, empirical and fieldstudies provide only weak evidence on such practices. This paperrefines the traditional informativeness criterion by abandoning theconventional full-commitment assumption. With the possibility ofrenegotiation, a signal's usefulness in incentive contractingdepends on its information quality, not simply on whether the signalis informative. This paper derives conditions for determining when asignal is useless and when it is useful. In particular, theseconditions will be met when the signal's information quality iseither sufficiently poor or sufficiently rich. (JEL C72,D82).

informativeness monitoring renegotiation principal-agent model 

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Copyright information

© Kluwer Academic Publishers 2001

Authors and Affiliations

  1. 1.Department of Accounting, School of Business and ManagementHong Kong University of Science and TechnologyHong Kong

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