Mandatory Disclosure Reform, Monitoring, and Executive Compensation

50 Pages Posted: 25 Mar 2016 Last revised: 16 Dec 2016

See all articles by Steven Balsam

Steven Balsam

Temple University - Department of Accounting

Elizabeth A. Gordon

Temple University - Department of Accounting

Xi Li

London School of Economics

Date Written: March 23, 2016

Abstract

Using the mandatory adoption of International Financial Reporting Standards (IFRS), we examine whether an exogenously imposed disclosure reform that increases the amount of information affects the level of executive compensation. Extant theories suggest that disclosure reforms could either raise or lower compensation. Increased disclosure improves monitoring, reducing managers’ informational advantage and opportunities for private benefits leading executives to seek increased explicit compensation. Alternatively, more disclosure allows shareholders to better observe managers’ effort and evaluate their ability, potentially reducing the risk and level of compensation. Using a difference-in-differences approach and multiple control groups, we examine CEO and CFO compensation from 45 countries (28 IFRS-adopting and 17 non-adopting) between 2001 and 2012. We find results consistent with compensation increasing after IFRS adoption implying a net reduction in managers’ informational advantage and private benefits. We also provide cross-sectional evidence suggesting the increase is related to improved monitoring ability under IFRS.

Keywords: Mandatory Disclosure Reform, IFRS, CFO, Executive Compensation, Monitoring, Responsibility

JEL Classification: M41, K22, J33

Suggested Citation

Balsam, Steven and Gordon, Elizabeth A. and Li, Xi, Mandatory Disclosure Reform, Monitoring, and Executive Compensation (March 23, 2016). Available at SSRN: https://ssrn.com/abstract=2013653 or http://dx.doi.org/10.2139/ssrn.2013653

Steven Balsam

Temple University - Department of Accounting ( email )

306 Speakman Hall
Philadelphia, PA 19122
United States
215-204-5574 (Phone)
215-204-5587 (Fax)

HOME PAGE: http://www.sbm.temple.edu/~drb/

Elizabeth A. Gordon

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
2152046422 (Phone)

Xi Li (Contact Author)

London School of Economics ( email )

Department of Accounting
Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/accounting/people/xi-li

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