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



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 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Amershi, A., R. Banker, and S. Datar. (1990). Economic Sufficiency and Statistical Sufficiency in the Aggregation of Accounting Signals. Accounting Review 65, 113-130.Google Scholar
  2. Antle, R., and J. Demski. (1988). “The Controllability Principle in Responsibility Accounting.” Accounting Review LXIII, 700-718.Google Scholar
  3. Antle, R., and A. Smith. (1986). “An Empirical Investigation of Relative Performance Evaluation of Corporate Executives.” Journal of Accounting Research 24, 1-39.Google Scholar
  4. Arya, A., J. Glover, and K. Sivaramakrishnan. (1997). “Commitment Issues in Budgeting.” Journal of Accounting Research 35, 273-278.Google Scholar
  5. Baiman, S., and J. S. Demski. (1980). “Economically Optimal Performance Evaluation and Control Systems.” Journal of Accounting Research 18, 184-220.Google Scholar
  6. Berge, C. (1963). Topological Spaces, translated by Patterson from French original, 1959. New York: Macmillan.Google Scholar
  7. Bushman, R. M., R. J. Indjejikian, and A. Smith. (1996). “CEOCompensation: The Role of Individual Performance Evaluation.” Journal of Accounting and Economics 21, 161-193.Google Scholar
  8. Coughlin, A., and R. Schmidt. (1985). “Executive Compensation, Management Turnover, and Firm Performance: An Empirical Investigation.” Journal of Accounting and Economics 7, 43-66.Google Scholar
  9. Crawford, V. P. (1990). “Equilibrium without Independence.” Journal of Economic Theory 50, 127-154.Google Scholar
  10. Demski, J. S., and H. Frimor. (1999). “Performance Measure Garbling Under Renegotiation in Multi-period Agencies.” Journal of Accounting Research 37, 187-214.Google Scholar
  11. Dewatripont, M. (1989). “Renegotiation and Information Revelation over Time: The Case of Optimal Labor Contracts.” Quarterly Journal of Economics 104, 589-620.Google Scholar
  12. Frederickson, J. R. (1990). “Relative Performance Information: The Effects of Common Uncertainty and Contract Type on Agent Effort.” Accounting Review 67, 647-669.Google Scholar
  13. Fudenberg, D., and J. Tirole. (1990). “Moral Hazard and Renegotiation in Agency Contracts.” Econometrica 58, 1279-1319.Google Scholar
  14. Gibbons, R., and K. Murphy. (1990). “Relative Performance Evaluation for Chief Executive Officers.” Industrial and Labor Relations Review 43, 30s-51s.Google Scholar
  15. Harris, M., and R. M. Townsend. (1981). “Resource Allocation under Asymmetric Information.” Econometrica 49, 33-64.Google Scholar
  16. Harsanyi, J. C. (1973). “Games with Randomly Disturbed Payoffs: A New Rationale for Mixed Strategy Equilibrium Points.” International Journal of Game Theory 2, 1-23.Google Scholar
  17. Hart, O., and J. Tirole. (1988). “Contract Renegotiation and Coasian Dynamics.” Review of Economic Studies 55, 509-540.Google Scholar
  18. HolmstrÖm, B. (1979). “Moral Hazard and Observability.” Bell Journal of Economics 10, 74-91.Google Scholar
  19. Indjejikian, R. J., and D. Nanda. (1999). “Dynamic Incentives and Responsibility Accounting.” Journal of Accounting and Economics 27, 177-201.Google Scholar
  20. Janakiraman, S. N., R. A. Lambert, and D. F. Larcker. (1992). “An Empirical Investigation of the Relative Performance Evaluation Hypothesis.” Journal of Accounting Research 30, 53-69.Google Scholar
  21. Jewitt, I. (1988). “Justifying the First-Order Approach to Principal-Agent Problems.” Econometrica 56, 1177-1190.Google Scholar
  22. Laffont, J. J., and J. Tirole. (1990). “Adverse Selection and Renegotiation in Procurement.” Review of Economic Studies 57, 597-625.Google Scholar
  23. Ma, C.-T. A. (1991). “Adverse Selection in Dynamic Moral Hazard.” Quarterly Journal of Economics 106, 255-275.Google Scholar
  24. Ma, C.-T. A. (1994). “Renegotiation and Optimality in Agency Contracts.” Review of Economic Studies 61, 109-129.Google Scholar
  25. Maher, M. W. (1987). “The Use of Relative Performance Evaluation in Organizations.” In William J. Bruns, Jr. and Robert S. Kaplan (eds.) Accounting & Management: Field Study Perspectives, Boston, Mass.: Harvard Business School Press.Google Scholar
  26. Marschak, J. (1972). “Optimal Systems for Information and Decision.” In Economic Information, Decision, and Prediction-Selected Essays: Volume II. Dordrecht, Holland: D. Reidel Publishing Company.Google Scholar
  27. Merchant, K. A. (1987). “How and Why Firms Disregard the Controllability Principle.” In William J. Bruns, Jr. and Robert S. Kaplan (eds.), Accounting & Management: Field Study Perspectives. Boston, Mass.: Harvard Business School Press.Google Scholar
  28. Murphy, K. (1985). “Corporate Performance and Managerial Remuneration.” Journal of Accounting and Economics 7, 11-42.Google Scholar
  29. Myerson, R. B. (1979). “Incentive Compatibility and the Bargaining Problem.” Econometrica 47, 61-73.Google Scholar
  30. Rosen, S. (1992). “Contracts and the Market for Executives.” In Lars Werin and Hans Wijkander (eds.), Contract Economics, Cambridge, Mass. and Oxford: Blackwell.Google Scholar
  31. Stiglitz, J. E. (1977). “Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market.” Review of Economic Studies 44, 407-430.Google Scholar
  32. Takayama, A. (1985). Mathematical Economics, 2nd ed. Cambridge: Cambridge University Press.Google Scholar
  33. Wolfson, M. A. (1985). “Tax, Incentive, and Risk-sharing Issues in the Allocation of Property Rights: The Generalized Lease-or-Buy Problem.” Journal of Business 58, 159-171.Google Scholar
  34. Yim, A. T. (1995). “Renegotiable Contracts and Monitoring Information.” Unpublished Ph.D. dissertation, Yale University.Google Scholar

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

Personalised recommendations