Pay Disparity and Financial Reporting Behavior

60 Pages Posted: 23 Mar 2023

See all articles by Wanying Jiang

Wanying Jiang

University of Texas of the Permian Basin; Louisiana State University

Joe Johnston

Illinois State University - Department of Accounting

Tianpei Li

Florida Atlantic University

Stephanie Walton

Louisiana State University, Baton Rouge - Department of Accounting

Abstract

Our study examines the relationship between executive pay disparity and firms’ financial reporting behavior. Tournament theory suggests that compensation differences between the CEO and other top management team executives can promote greater performance and reduce CEO entrenchment. We posit that pay disparity can also result in financial reporting behaviors that lower stakeholders’ disclosure integration costs. We analyze two dimensions of financial reporting, financial reporting similarity and timeliness. We find that a larger pay disparity between the CEO and other top executives is associated with greater financial reporting similarity and timelier financial reporting. Further, we note that equity-based compensation, as opposed to salary compensation, appears to be driving these relationships, consistent with tournament theory. We provide evidence that tournament incentives can result in firms providing external stakeholders with timely and usable financial information, particularly if such incentives are prompted by equity compensation differences.

Keywords: Financial Reporting Similarity, Timeliness, Pay Disparity, Tournament Theory, Information Processing Costs

Suggested Citation

Jiang, Wanying and Johnston, Joseph Atkins and Li, Tianpei and Walton, Stephanie, Pay Disparity and Financial Reporting Behavior. Available at SSRN: https://ssrn.com/abstract=4397673 or http://dx.doi.org/10.2139/ssrn.4397673

Wanying Jiang (Contact Author)

University of Texas of the Permian Basin ( email )

4901 East University
Odessa, TX 79762
United States

Louisiana State University ( email )

Baton Rouge, LA 70803
United States

Joseph Atkins Johnston

Illinois State University - Department of Accounting ( email )

United States
309-438-3830 (Phone)

Tianpei Li

Florida Atlantic University ( email )

Boca Raton, FL 33431
United States

Stephanie Walton

Louisiana State University, Baton Rouge - Department of Accounting ( email )

E.J. Ourso College of Business Administration
2800 Business Education Complex
Baton Rouge, LA 70803
United States

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