Ratcheting and the role of relative target setting

Autores: Aranda León, María del Carmen; Arellano Gil, Javier Ignacio; Davila Parra, Antonio
Título de la revista: ACCOUNTING REVIEW
ISSN: 0001-4826
Volumen: 89
Número: 4
Páginas: 1197 - 1226
Fecha de publicación: 2014
Managers use a variety of information to set performance targets. Using data from 376 branches of a large travel retailer over five years, this study documents supervisors considering the relative performance of comparable units in target setting, which we term relative target setting (RTS). We find evidence of RTS after controlling for individual past performance in the form of ratcheting. Our findings also indicate that RTS partially shapes the use of other information on past performance. Specifically, we find that the magnitude of ratcheting decreases (increases) with RTS for favorable (unfavorable) performance variances, and the asymmetry of ratcheting characterized by different ratcheting coefficients for unfavorable than for favorable variances is significant for large absolute magnitudes of RTS. Managers use the flexibility associated with the subjectivity of the target-setting process to weight peer and individual information differently across different units.