Mandatory Disclosure Reform, Monitoring, and Executive Compensation

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.

Number of Pages in PDF File: 50

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

JEL Classification: M41, K22, J33