Labor Market Benefit of Disaggregated Disclosure

Abstract

Asymmetric information is a fundamental friction that results in mismatches and efficiency losses in the labor market. In this study, we posit that more disaggregated financial disclosure by a CEO candidate’s prior employer can help the hiring firm better assess the possible fit between its operational needs and the candidate’s skill set. Using a mandatory segment reporting reform in the U.S. (SFAS 131) as an exogenous shock to disclosure disaggregation, we find a significant increase in the firm-CEO match quality when the hiring firm has access to more disaggregated segment information about the external candidate’s past employment. Further, the improvement in firm-CEO matching is greater when segment information is incrementally more useful for evaluation of candidate skills. These findings reveal a novel labor market benefit of disaggregated financial disclosure: alleviating pre-hiring information deficiencies and facilitating efficient allocation of CEO talent across firms.

Keywords: asymmetric information, disclosure disaggregation, matching, labor market frictions, CEO hiring, executive labor market

JEL Classification: D82, D83, M41, J23, J24