Financial Disclosure Transparency and Employee Wages

Abstract

We test the hypothesis that less transparent financial disclosures are an undesirable firm attribute that increases the amount of information and unemployment risk that employees bear, resulting in a compensating wage differential. Using establishment-level wage data from the U.S. Census Bureau, we find evidence consistent with this hypothesis. We document that firms with less transparent disclosures pay their employees more, especially when employees own more stock in their firm, bear greater information acquisition costs, and have more influence in the wage-setting process. Our results also hold to utilizing instrumental variables and two quasi-natural experiments arising from the passage of the Sarbanes-Oxley Act as shocks to the transparency of a firm’s financial reporting environment.

Keywords: Transparency, Disclosures, Employee Wages, Management Forecasts, Readability

JEL Classification: M40, M41, J31