The Effect of Peer Group Overlap in Executives’ RPE Contracts on Competitive Aggressiveness

Abstract

We investigate how peer group overlap within executives’ relative performance evaluation (RPE) contracts influences firms’ competitive aggressiveness. Conditional on using RPE, we hypothesize and find that if two firms have each other as peers in their respective RPE contracts, this creates a strategic interaction, which in turn increases their competitive aggressiveness. Specifically, firms in growing industries act aggressively by taking more frequent competitive actions, while firms in mature industries act aggressively through taking more complex actions. This also holds for a sample of exogenous changes in peer group overlap and when we compare it to non-RPE firms.