Page 37 - 32.3

NTU Management Review Vol. 32 No. 3 Dec. 2022

The Effect of Information Opacity on the Weighting of
Performance Measures in the Compensation Contracts of CEOs:
Evidence from U.S. Firms

Tay-Chang Wang, Department of Accounting, and Center for Research in Econometric Theory and
Applications, National Taiwan University
Chia-Wen Liu, Department of Accounting, and Center for Research in Econometric Theory and
Applications, National Taiwan University
Liang-Shiuan Chen, Department of Accounting, National Taiwan University

1. Purpose and Objective

In CEOs’ compensation contracts, accounting-based performance measures and
stock-based performance measures are the two most common performance indicators.
The purpose of this study is to examine the effect of the information opacity of accounting
numbers and stock-related information on the weighting of accounting-based and stock-

based performance measures in CEOs’ compensation contracts.
The different characteristics of the information opacity between accounting
information and stock-related information motivate us to carry out the research.
Accounting information provides investors and creditors with financial reporting of

particular companies for making investing or financing decisions. Such information is also
legally required to be submitted to the officials when a company applies to become a listed
firm. Therefore, the information opacity of accounting information, in terms of information
volume, should be similar across firms.

However, the information opacity of stock-related information may not be similar
across firms. Some well-known firms (e.g., TSMC) have a high volume of stock-related
information, as many stock analysts analyze, evaluate, and provide suggestions on the
stocks of these firms. In contrast, some firms are less known or almost unknown to

investors due to lack of analyses or market information, and thus have a relatively low
volume of stock-related information.
According to the theory proposed by Banker and Datar (1989), the weighting of one
performance measure in the compensation contract would decrease if the opacity of the

information related to the performance measure is high. To verify the theory, we conduct

27