SSRN-Peer Firms in Relative Performance Evaluation by Ana Albuquerque

Financial theory suggests that CEO compensation should be based on relative performance.Why? It captures what financeprofessors like to call external shocks (for the rest of you this means that things that are beyond the control of manager). For instance if you are paid by stock, for better or worse you are at least partially at the mercy of the stock market. So essentially the peer group is a