Entrenchment or Efficiency? CEO-to-Employee Pay Ratio and the Cost of Debt
34 Pages Posted: 17 Feb 2021
Date Written: February 28, 2020
Using new data on S&P 1500 firms’ CEO-to-employee pay ratios disclosed by mandate of Section 953(b) of the Dodd-Frank Act, we examine the effect of within-firm pay inequality on bond yield spreads. We find a significant negative relation between industry-adjusted CEO-to-employee pay ratio and yield spreads while controlling for covariates and endogeneity. This result is the strongest in financially constrained, labor intensive, and small-to-medium sized firms. The evidence supports the incentive-provision explanation of CEO-to-employee pay disparity, reflecting efficient CEO compensation rather than rent extraction. We also document selection bias in self-reported pay ratios, highlighting the efficacy of the Dodd-Frank provisions.
Keywords: CEO-to-employee pay ratio, Dodd-Frank Act, Pay disparity, Executive compensation, Median employee pay, Cost of debt
JEL Classification: G28, G30, G31, G34
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