Peer comparison and management forecast behavior

This study examines whether incentive contracts that compares managers’ compensation to that of stronger peers can influence voluntary disclosure behaviour and improve transparency. We obtain information regarding peer-based compensation arrangements from US public firms and find that managers whose compensation is benchmarked against peers who, on average, have higher managerial abilities, tend to issue management earnings forecasts more frequently. Furthermore, the peer comparison incentive effects are more pronounced when firms depend more on external financing, face greater product market threats, and have more endowed growth opportunities. Overall, our study highlights the effects of pressure arising from comparison with higher-quality peers on firms’ information environment. We contribute to the literature on tournament-based implicit incentives, peer effects, managerial ability, and economic consequences in the context of voluntary disclosures.