“Relative Performance Evaluation and Contagion
in Financial Reporting Quality”
by Çelim Yıldızhan
University of Nevada – Koç University
Place: MA-330
Abstract
We examine how relative performance evaluation (RPE) contracts shape financial reporting behavior by inducing strategic interactions between firms. Using mandated disclosures of actual peer groups in executive compensation contracts, we identify significant contagion in financial reporting quality: firms increase earnings management when their RPE-designated peers do the same. This effect is strongest when target and peer firms experience similar performance shocks and share incentives, consistent with strategic complementarity. In contrast, contagion weakens or reverses when performance diverges or manipulation costs differ substantially consistent with strategic substitution. While RPE is often viewed as a tool to improve contracting efficiency by filtering out common shocks, our findings show that it can also amplify distortions in financial reporting when peer-linked incentives create pressure to manipulate earnings.
Bio
Çelim Yıldızhan received his PhD in Finance from the University of Michigan. He has taught at the University of Nevada, Las Vegas, Koç University and the University of Georgia. His research examines how information frictions and incentive structures shape financial decisions by investors, managers, and markets. He works at the intersection of empirical asset pricing, financial accounting, and household finance, employing high-resolution data and theory-consistent empirical strategies. Across my projects, he studies how limits in attention, processing capacity, and incentive alignment generate predictable distortions in pricing, reporting, and portfolio choice. He has four publications in Financial Times Top-50 journals, and I am currently advancing a new research program using large-scale retail trading data and randomized field interventions.
