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Renegotiation and Relative Performance Evaluation: Why an Informative Signal may be Useless

Yim, A. (2001). Renegotiation and Relative Performance Evaluation: Why an Informative Signal may be Useless. Review of Accounting Studies, 6(1), pp. 77-108. doi: 10.1023/A:1011386104784

Abstract

Although Holmström's informativeness criterion provides a theoretical foundation for the controllability principle and inter firm relative performance evaluation, empirical and field studies provide only weak evidence on such practices. This paper refines the traditional informativeness criterion by abandoning the conventional full-commitment assumption. With the possibility of renegotiation, a signal's usefulness in incentive contracting depends on its information quality, not simply on whether the signal is informative. This paper derives conditions for determining when a signal is useless and when it is useful. In particular, these conditions will be met when the signal's information quality is either sufficiently poor or sufficiently rich.

Publication Type: Article
Additional Information: The final publication is available at Springer via http://dx.doi.org/10.1023/A:1011386104784
Publisher Keywords: informativeness, monitoring, renegotiation, principal-agent model
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/14469
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