The Real Effects of Disclosure Regulation: Evidence from Mandatory CFO Compensation Disclosure
38 Pages Posted: 31 May 2022
Date Written: May 20, 2022
The 2006 SEC rule, by changing the definition of Named Executive Officers, mandates CFO compensation disclosure. Using this setting and a difference-in-differences research design, we study the real effects of CFO compensation disclosure regulation on CFO job performance. We hypothesize that the disclosure of CFO compensation information, by facilitating shareholder monitoring of the board in providing appropriate incentives to CFOs, leads to better CFO job performance in providing high-quality financial reports. The analyses support our prediction: the treatment firms, which start disclosing CFO compensation information under the 2006 rule, compared to the control firms, which already disclose CFO compensation before 2006, experience an improvement in CFO performance, as exhibited in decreases in accounting misstatements and unexplained audit fees. The results are more pronounced for firms with concentrated ownership, smaller compensation committees, and CFOs subject to weaker monitoring by audit committees. Overall, we provide evidence of a real effect resulting from mandatory CFO compensation disclosure.
Keywords: SEC compensation-disclosure mandate, accounting misstatements, unexplained audit fees, CFO performance, real effects of disclosure regulations
JEL Classification: G38, G30, M41
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