Ma, PaulShin, Jee EunWang, Charles2017-03-232017-03-23Ma, Paul, Jee Eun Shin, and Charles C.Y. Wang. "Relative Performance Benchmarks: Do Boards Follow the Informativeness Principle?" Harvard Business School Working Paper, No. 17-039, November 2016. (Revised May 2017.)http://nrs.harvard.edu/urn-3:HUL.InstRepos:30907599Relative TSR (rTSR) is increasingly used by market participants to judge and incentivize managerial performance. We evaluate the efficacy, reasons, and implications of firms' benchmarks in rTSR-based contracts. Although compensation consultants suggest that a primary objective of rTSR is to filter shocks unrelated to managerial performance, following the informativeness principle, we document that a significant subset of firms, who choose index-based benchmarks, do not adequately achieve this objective. Further, the index-benchmark selection is associated with governance-related frictions, and not driven by plausible alternative theories. Both structural calibration and reduced-form estimates reveal significant negative performance implications from sub-optimal peer-selection.en-USResearch Paper or Report2017-03-23