Do Equity Markets Care About Income Inequality? Evidence from Pay Ratio Disclosure

65 Pages Posted: 11 Feb 2020 Last revised: 11 Feb 2021

See all articles by Yihui Pan

Yihui Pan

University of Utah - Department of Finance

Elena Pikulina

Finance Division, Sauder School of Business, University of British Columbia (UBC)

Stephan Siegel

University of Washington - Michael G. Foster School of Business; CESifo

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: January 15, 2020

Abstract

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

Suggested Citation

Pan, Yihui and Pikulina, Elena and Siegel, Stephan and Wang, Tracy Yue, Do Equity Markets Care About Income Inequality? Evidence from Pay Ratio Disclosure (January 15, 2020). Available at SSRN: https://ssrn.com/abstract=3521020 or http://dx.doi.org/10.2139/ssrn.3521020

Yihui Pan

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Elena Pikulina

Finance Division, Sauder School of Business, University of British Columbia (UBC) ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
6048223314 (Phone)

HOME PAGE: http://epikulina.com

Stephan Siegel (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://faculty.washington.edu/ss1110/

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
381
Abstract Views
1,990
rank
93,667
PlumX Metrics