Peering into Compensation Disclosure: Semantic Similarity and Peer Selection

47 Pages Posted: 3 Dec 2021 Last revised: 4 Apr 2022

See all articles by Maclean Gaulin

Maclean Gaulin

University of Utah - David Eccles School of Business

Xiaoxia Peng

University of Utah - David Eccles School of Business

Date Written: November 1, 2021

Abstract

This paper studies economic determinants of semantic similarity in executive compensation disclosures and its implications for compensation peer selection. We employ a novel measure based on a natural language processing algorithm with machine learning---document embeddings---to capture nuanced semantic aspects of compensation disclosure. Consistent with our predictions, we demonstrate that firms facing similar economic conditions, specifically size and industry, and firms with common compensation consultants are all associated with greater semantic similarity in their compensation disclosures. We then show that similar compensation disclosures can predict future compensation peer selection incremental to economic factors that explain both disclosure similarity and peer selection, suggesting that our measure captures distinct explanatory information about peer selection. This semantics-based measure is widely applicable to the literature on narrative disclosures as it addresses some of the shortcomings of traditional textual measures, thus could enable more research into cross-firm comparisons and disclosure clustering, among other subjects.

Keywords: Compensation disclosure, executive compensation, document embedding, semantic similarity, textual analysis

JEL Classification: J41, M12, M41, M52

Suggested Citation

Gaulin, Maclean and Peng, Xiaoxia, Peering into Compensation Disclosure: Semantic Similarity and Peer Selection (November 1, 2021). Available at SSRN: https://ssrn.com/abstract=3971286 or http://dx.doi.org/10.2139/ssrn.3971286

Maclean Gaulin

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801.585.0324 (Phone)

HOME PAGE: http://mgaulin.com

Xiaoxia Peng (Contact Author)

University of Utah - David Eccles School of Business ( email )

1655 E Campus Center Dr
Salt Lake City, UT 84112
United States

HOME PAGE: http://www.xiaoxiapeng.com

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