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

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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).

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Authors and Affiliations

  1. Department of Accounting, School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong

    Andrew Tzelung Yim

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  1. Andrew Tzelung Yim
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Correspondence to Andrew Tzelung Yim.

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Yim, A.T. Renegotiation and Relative Performance Evaluation: Why an Informative Signal May Be Useless. Review of Accounting Studies 6, 77–108 (2001). https://doi.org/10.1023/A:1011386104784

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