Managerial Reputation and the Use of Earnings in Performance Evaluation
54 Pages Posted: 21 Aug 2009
Date Written: August 21, 2009
Abstract
This study examines how managerial reputation influences the use of earnings- and stock-based measures to evaluate managers in firms. Using lagged managerial press citations, lagged five-year industry-adjusted stock performance, and managerial awards to proxy for managerial reputation, we provide evidence that when managerial reputation is higher, firms place greater weight on earnings-based measures to evaluate the managers compared to when managerial reputation is lower. However, beyond a certain level of managerial reputation, this relation is less positive and typically negative. We find weak evidence of a non-linear relation between reputation and the use of stock-based measures. This study contributes to the literature by providing evidence that perceived managerial attributes play a vital role in influencing how firms use performance measures to evaluate their managers. Furthermore, it is the first study to document non-linear relations in the use of performance measures, thus adding to our understanding of heterogeneity in the absolute use of earnings-, and compared to stock-based measures across firms.
JEL Classification: G30, J30, J41, M40
Suggested Citation: Suggested Citation