CEO Pay Ratio Voluntary Disclosures and Investor Reactions

45 Pages Posted: 25 Jun 2020 Last revised: 8 Mar 2021

See all articles by Jason Sandvik

Jason Sandvik

A.B. Freeman School of Business

Lisa LaViers

Tulane University

Da Xu

Tulane University - A.B. Freeman School of Business

Date Written: June 2, 2020

Abstract

Since 2018, the Security and Exchange Commission (SEC) has required firms to disclose the ratio of their Chief Executive Officer's (CEO's) and median employee’s pay. Due to the uncertainty surrounding the ratio's interpretation, some managers use voluntary disclosures to complement and clarify their mandatory disclosures. We document this behavior by manually inspecting the proxy statements of all firms in the S&P 1500. We predict and find that a firm's propensity to provide voluntary disclosures increases in the magnitude of its pay ratio. Drawing on equity and signaling theory, we predict that investor reactions will be significantly more impacted by the voluntary disclosure behavior of firms whose pay ratios are in the middle of the distribution. Investors rely more on the voluntary disclosures of middle ratio firms because the magnitude of their ratio provides an ambiguous signal of pay fairness, relative to low or high ratios. We find empirical support for this prediction, and we find that investor responses are strongest among firms with high institutional ownership, which we attribute in part to the demands of institutional investors for increased human capital management disclosures.

Keywords: CEO Pay Ratio, Pay Fairness, Voluntary Disclosure, Executive Compensation

Suggested Citation

Sandvik, Jason and LaViers, Lisa and Xu, Da, CEO Pay Ratio Voluntary Disclosures and Investor Reactions (June 2, 2020). Available at SSRN: https://ssrn.com/abstract=3617262 or http://dx.doi.org/10.2139/ssrn.3617262

Jason Sandvik (Contact Author)

A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Lisa LaViers

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

Da Xu

Tulane University - A.B. Freeman School of Business

7 McAlister Drive
New Orleans, LA 70118
United States

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