Equity Market Reaction to Pay Dispersion and Shareholders’ Prosocial Preferences

59 Pages Posted: 11 Feb 2020 Last revised: 23 Apr 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

Do equity investors care about pay dispersion and income inequality? We address this question by examining equity markets’ reaction and investors’ portfolio rebalancing in response to the first-time disclosure by U.S. public companies of the ratio of CEO to median worker pay in 2018. We find that firms disclosing high pay ratios experience significantly negative abnormal announcement returns. Additional evidence suggests that equity markets “dislike” high pay dispersion rather than 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 equity markets are concerned about high within-firm pay dispersion, and investors’ prosocial preferences with respect to income inequality are a channel through which high pay ratios negatively affect firm value.

Keywords: Income inequality, pay dispersion, CEO-worker pay ratio, prosocial preferences, social norms

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 and Shareholders’ Prosocial Preferences (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

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