Do CEOs Deserve their Raises? Evidence from Stock Returns after Subjective Performance Reviews

This paper studies the information content of CEO subjective performance reviews. We propose a novel proxy of positive reviews based on evidence of real CEO contracts: salary raises. It shows that performance review outcomes predict long-term stock returns. A long–short portfolio strategy that invests in firms with CEO salary increases earns abnormal returns of 2%–4% annually. Positive subjective reviews also predict more announcements of new product developments and greater abnormal returns around these announcements, suggesting that they indeed indicate successful long-term strategy.