Entrenchment or Efficiency? CEO-to-Employee Pay Ratio and the Cost of Debt

34 Pages Posted: 17 Feb 2021

See all articles by Katsiaryna Bardos

Katsiaryna Bardos

Fairfield University

Steven Kozlowski

Fairfield University

Michael Puleo

Fairfield University

Date Written: February 28, 2020

Abstract

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

Suggested Citation

Bardos, Katsiaryna and Kozlowski, Steven and Puleo, Michael, Entrenchment or Efficiency? CEO-to-Employee Pay Ratio and the Cost of Debt (February 28, 2020). Available at SSRN: https://ssrn.com/abstract=3766509 or http://dx.doi.org/10.2139/ssrn.3766509

Katsiaryna Bardos (Contact Author)

Fairfield University ( email )

Dolan School of Business
1073 North Benson Road
Fairfield, CT 06824
United States

Steven Kozlowski

Fairfield University ( email )

Dolan School of Business
1073 North Benson Road
Fairfield, CT 06824
United States

Michael Puleo

Fairfield University ( email )

Dolan School of Business
1073 North Benson Road
Fairfield, CT 06824
United States

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