Do Equity Markets Care About Income Inequality? Evidence from Pay Ratio Disclosure
80 Pages Posted: 11 Feb 2020 Last revised: 24 May 2021
Date Written: January 15, 2020
Do equity markets care about income inequality? We address this question by examining equity markets’ reaction and investors’ portfolio rebalancing in response to the first-time disclosure of the ratio of CEO to median worker pay by U.S. public companies in 2018. We find that firms’ disclosing higher pay ratios experience significantly lower abnormal announcement returns. Additional evidence suggests that equity markets “dislike” high pay dispersion rather than high CEO pay or low worker pay. Firms whose shareholders are more inequality-averse experience a more pronounced negative market response to high pay ratios compared to firms with less inequality-averse shareholders. Finally, we find that during 2018 more inequality-averse investors rebalance their portfolios away from high pay ratio stocks relative to other investors. Overall, our results suggest that equity markets are concerned about high within-firm pay dispersion, and investors’ attitude towards income inequality is a channel through which high pay ratios negatively affect firm value.
Keywords: Income inequality, pay dispersion, CEO-worker pay ratio, inequality aversion
JEL Classification: G13, G14, G41, G23, J31, L25, M52
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