Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform
54 Pages Posted: 24 Oct 2019
Date Written: October 1, 2019
Beginning in 2018, U.S. public firms were required to report the ratio of the chief executive officer’s (CEO) compensation to their median employee’s compensation in the annual proxy statement. We find that this pay ratio disclosure leads to declines in both total compensation and pay-for-performance sensitivity for CEOs relative to chief financial officers. Our results are stronger for firms that are more sensitive to populist political pressure. Consistent with popular press coverage playing a role in influencing firm responses to the standard, firms disclosing higher pay ratios garner more compensation-related media coverage around the filing of their annual proxy statements and display negative abnormal returns around proxy filings in the presence of elevated media coverage.
Keywords: CEO compensation, pay ratio, disclosure, corporate governance, pay-for-performance, media coverage
JEL Classification: G34, G38, M12, M52
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