Compensation, life cycle, and the value relevance of performance measures

Authors: Yu-Lin Chang; Chung-Jen Fu; Chun-Ju Liu;

Journal: Chia Da Management Review. Jun. 2011, 31(1): 93-133.

Keywords: Top manager's compensation;Life cycle;Nonfinancial performance measures;Value relevance

Abstract:
In light of agency theory, this study examines the effect of contracting incentives on the value relevance of five performance measures, including earnings, product quality, market shares, patents and cycletime. We apply and extend the Ohlson (1995) valuation model based on a sample from periods 1997 to 2006 in the information electronic industry in Taiwan to examine the role of top manager's compensation in value-relevance research. Our findings indicate that top manager's compensation positively moderates the association between firm value and performance measures. We further find that compensation can enhance the value relevance of nonfinancial performance measures better for firms in the growth stage than firms in the mature and decline stages. This study contributes new insight going beyond the relations observed between top manager's compensation and the value relevance of nonfinancial performance measures.