Equity Market Reaction to Pay Dispersion: Evidence from CEO-Worker Pay Ratio Disclosure

66 Pages Posted: 11 Feb 2020

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

Starting in 2018, U.S. public companies are required to disclose the ratio of CEO to median worker pay, providing the first opportunity to examine equity markets’ reaction to within-firm pay dispersion. We find a negative market reaction to firms disclosing high pay ratios. Additional evidence suggests that equity markets “dislike” high pay dispersion independently of high CEO pay or low worker pay. In the cross-section, firms whose shareholders have stronger prosocial preferences experience a significantly more negative market response to high pay ratios. Consistent with investors’ prosocial preferences moderating the initial market reaction, we find that during 2018 investors with stronger prosocial preferences rebalance their portfolios away from high pay ratio stocks relative to other investors. Overall, our results suggest that investors’ prosocial preferences, in particular with respect to within-firm pay dispersion, is a channel through which high pay ratios negatively affect firm value.

Keywords: CEO-worker pay ratio, income inequality, pay dispersion, pay disparity, prosocial preferences, corporate social responsibility, ESG, Dodd-Frank Act

JEL Classification: G13, G14, G41, G23, J31, L25, M52

Suggested Citation

Pan, Yihui and Pikulina, Elena and Siegel, Stephan and Wang, Tracy Yue, Equity Market Reaction to Pay Dispersion: Evidence from CEO-Worker Pay Ratio Disclosure (January 15, 2020). Available at SSRN: https://ssrn.com/abstract=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

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