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Review of Accounting Studies
Erschienen in: Review of Accounting Studies 1/2024

17.10.2022

CEO pay ratio voluntary disclosures and stakeholder reactions

verfasst von: Lisa LaViers, Jason Sandvik, Da Xu

Erschienen in: Review of Accounting Studies | Ausgabe 1/2024

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Abstract

Since 2018 the Security and Exchange Commission has required firms to disclose the ratio of their chief executive officer’s and median employee’s pay. This rule was enacted to address increasing concerns from investors about the human capital management practices of firms. Due to the uncertainty surrounding the ratio’s interpretation, some managers provide voluntary disclosures to complement and clarify their mandatory disclosures. We document this behavior by manually inspecting the proxy statements of all firms in the S&P 1500. We predict and find that a firm’s propensity to provide voluntary disclosures increases in the magnitude of its pay ratio. This relation is only present, however, when voluntary disclosures contain firm-specific information, as opposed to boilerplate information that is similar across firms. In line with these findings, we show that investors react differently to firm-specific disclosures than to boilerplate disclosures, especially when firms have relatively large CEO pay ratios. We also show that voluntary disclosure provision impacts compensation-related media coverage.
Vorheriger Artikel Retail shareholders and the efficacy of proxy voting: evidence from auditor ratification
Nächster Artikel Firm innovation and covenant tightness

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Fußnoten
1
CEO pay ratios were first required for fiscal years that began on or after January 1st, 2017, so nearly all of the initial disclosures appeared in proxy statements filed in 2018.
 
2
The most commonly used exclusion is the de minimis exemption for international employees who make up less than 5% of the firm’s workforce. A less commonly used, but also allowed, exclusion is for workers in countries where data privacy laws do not allow for public disclosure.
 
3
Einhorn (2005) assumes that the conditional distribution of voluntary signals shifts towards higher values when the mandatory signal increases. In the model, the distributional shift exactly offsets the effect of changes in the mandatory signal on the threshold level for providing voluntary disclosures. The author notes that in more realistic environments, the effect on the threshold may dominate the effect on the conditional distribution of signals, leading to a significant effect of higher mandatory signals on voluntary disclosure likelihood. As such, our empirical tests can be viewed as joint tests of whether (1) the threshold level for providing voluntary disclosures changes and (2) the conditional distribution of voluntary signals does not shift in a way that exactly offsets the change in threshold level.
 
4
These voluntary disclosures are provided alongside the mandatory disclosure, and managers will only provide them if doing so is likely to improve stakeholders’ overall perceptions of the firm. Other research has studied managers’ decisions to preemptively disclose seemingly “bad news,” which can result in better litigation outcomes (Skinner, 1994; 1997). These settings differ from ours, in that the “bad news” that is disclosed is generally thought to be information that will come to light eventually anyway, so managers preemptively share it. The information in the voluntary disclosures that we study, on the other hand, is being shared purely voluntarily, as no regulations exist that would require firms to share the information at a later date.
 
5
We use ISS’s S&P 1500 classification to identify firms. Firms move in and out of the S&P 1500 over time, so ISS’s classification includes all of the firms that were part of the index in a given year. We focus on S&P 1500 firms because the equity of these firms is highly liquid, which allows us to more precisely identify investor reactions. In addition, we control for excess CEO compensation in our empirical tests, which requires Execucomp data that only cover the S&P 1500 firms.
 
6
See the SEC’s Final Rule SEC (2015) and Engel (2017), Black et al. (2017), Buyniski et al. (2017), Equilar (2018), Lifshey (2018), Investors (2018), Wells et al. (2019), and Burek et al. (2019).
 
7
We resolved differences between the two through our own manual inspection of the disclosures.
 
8
The SEC requires that supplemental ratios not be displayed more prominently than mandated CEO pay ratios.
 
9
Our results are very similar if we use a probit model or linear probability estimation instead.
 
10
The marginal effect is calculated by averaging over the covariates used as control variables. We calculate the effect of doubling a firm’s pay ratio on the firm’s disclosure likelihood as follows: ln(2.00)×8.86% = 6.14%.
 
11
We implement this entropy balancing procedure in all of our subsequent tests, adapting the treatment and control groups to be appropriate for the samples under consideration.
 
12
In other words, we remove observations in which firms provide exactly one voluntary disclosure, reducing the sample size from 1,506 observations to 871 observations.
 
13
For comparison, the baseline result in Pan et al. (2022), who consider the relation between pay ratio magnitude and market reactions, is that a one-standard-deviation increase in the pay ratio reduces a firm’s seven-day CAR by about 42 basis points.
 
14
In Table 8, we present results when we separately regress CAR[− 2,+ 2]i on each individual disclosure type. The positive coefficients on Supp. Ratio and Median Emp. and the negative coefficients on Comp. Phil. and Comparison, though not significant, align with our main takeaways from Column (3) of Table 5.
 
15
For example, one month after Weight Watchers reported its CEO pay ratio, CBS News published an article with the title, “At This Company, the CEO Makes 6,000 Times a Typical Worker’s Pay” (Picchi, 2018).
 
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Metadaten
Titel
CEO pay ratio voluntary disclosures and stakeholder reactions
verfasst von
Lisa LaViers
Jason Sandvik
Da Xu
Publikationsdatum
17.10.2022
Verlag
Springer US
Erschienen in
Review of Accounting Studies / Ausgabe 1/2024
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-022-09720-1

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