Voluntary Performance Disclosures in the CD&A
58 Pages Posted: 18 Feb 2021
Date Written: February 1, 2021
This paper examines how firms use voluntary disclosures in response to information asymmetries between firms and shareholders surrounding the design and approval of executive compensation. Prior research finds that firm performance is a primary determinant of pay and negative shareholder response to pay is largely influenced by recent performance. We find evidence that firms voluntarily increase discussion of their performance in the Compensation Discussion and Analysis (CD&A) section of the annual proxy statement when shareholder scrutiny is high, i.e., when compensation levels are high relative to peers and performance. This relation strengthens after Say-on-Pay, when shareholder scrutiny arguably increased for all firms. These voluntary performance disclosures are associated with higher shareholder approval and more positive proxy advisor recommendations, as well as higher relative compensation in the subsequent year. Altogether, our findings suggest CD&A performance disclosures allow firms to communicate the context of their compensation choices in order to mitigate negative shareholder scrutiny.
Keywords: Proxy statement disclosure, CD&A disclosure, shareholder scrutiny, voluntary disclosure
JEL Classification: D22, J33, M41
Suggested Citation: Suggested Citation