Informativeness of Peer Performance and Analyst Forecasts in Performance Target Setting

Abstract

Firms consider external information such as peer performance data and analyst forecasts when setting performance targets because this information provides relevant benchmarks about agents’ productivity. Using the EPS targets of S&P 1500 firms from the 2006–2014 period, we examine whether firms’ reliance on certain benchmarks depends on the relative informativeness of the external information. We find that firms put greater weight on analyst forecasts than on peer performance information because their profitability is less likely to comove with that of their peer firms. We also find that the use of forecasts increases in settings where analyst forecasts are more informative regarding focal firms’ profitability.