Do Compensation Disclosures Matter for SoP Voting?
64 Pages Posted: 21 Jan 2016
Date Written: November 23, 2015
This paper examines whether investors rely on disclosures of managerial performance measures in proxy statements to make their Say-on-Pay (SoP) decisions and, if so, whether firms use this mechanism to increase their likelihood of obtaining SoP approval. Applying a textual analysis based approach to parse the contents of proxy materials for keywords and phrases related to managerial performance measurement, we create a text-based score and find that this score is positively associated with the likelihood of SoP vote approval. This result holds even among the sub-sample of firms that receive an ‘Against’ recommendation from a major proxy advisor firm. We further document that firms that fail an SoP vote increase their disclosure of performance measures in subsequent period’s proxy statements and that the increased disclosures benefit firms by improving the likelihood of obtaining an approval in the next SoP vote. Finally, we find that the SoP mandate has increased firms’ responsiveness to investors’ demands for compensation-related disclosures. Our findings show that disclosure of performance measures is a credible tool that companies can effectively employ to address shareholders’ concerns on executive pay.
Keywords: Say-on-Pay, executive compensation, textual disclosures
JEL Classification: G30, M12, M41
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