The Effect of Disclosure on the Pay-Performance Relation

45 Pages Posted: 9 Nov 2012  

Gus De Franco

Tulane University - A.B. Freeman School of Business

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Stephannie Larocque

University of Notre Dame - Mendoza College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 7, 2012

Abstract

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.

Keywords: Disclosure, monitoring, pay-performance, agency costs, management guidance, research design

JEL Classification: J33, M41, M52, G29, G30, G34

Suggested Citation

De Franco, Gus and Hope, Ole-Kristian and Larocque, Stephannie, The Effect of Disclosure on the Pay-Performance Relation (November 7, 2012). Journal of Accounting and Public Policy, Forthcoming; Rotman School of Management Working Paper No. 2172303. Available at SSRN: https://ssrn.com/abstract=2172303

Gus De Franco

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Stephannie A. Larocque

University of Notre Dame - Mendoza College of Business ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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