The Effect of Disclosure on the Pay-Performance Relation
Gus De Franco
Tulane University - A.B. Freeman School of Business
University of Toronto - Rotman School of Management
University of Notre Dame - Mendoza College of Business
November 7, 2012
Journal of Accounting and Public Policy, Forthcoming
Rotman School of Management Working Paper No. 2172303
We examine whether greater transparency leads to improved evaluation and rewarding of management. We posit that disclosure improves board effectiveness at monitoring executives and in strengthening the link between pay and performance. We use management guidance as our empirical proxy for disclosure and document the following. We predict and find higher sensitivity of CEO compensation to performance (both accounting and stock returns) for firms that issue management guidance than for firms that do not. Our results are robust to multiple tests that address the potential endogeneity of management’s decision to issue guidance (using a Heckman self-selection model, employing a matched-sample approach, and identifying a subsample of firms in which increased disclosure is likely to be exogenous), tests that control for alternative explanations, and tests that use conference calls as an alternative disclosure metric.
Number of Pages in PDF File: 45
Keywords: Disclosure, monitoring, pay-performance, agency costs, management guidance, research design
JEL Classification: J33, M41, M52, G29, G30, G34
Date posted: November 9, 2012
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