Influential Information Supply or Just a Modern Pillory? Investor Perceptions of the CEO Pay Ratio Disclosure Rule

Abstract

We investigate investor perceptions of the US CEO pay ratio disclosure rule by studying market reactions to its implementation. Our findings reveal an overall negative market reaction, suggesting that investors anticipated the disclosure rule to be detrimental on average across firms. The negative reaction is more pronounced for firms that investors expected to disclose high pay ratios. That is, investors anticipated stronger disadvantages for firms that are required to disclose high pay ratios. This finding suggests investors expected mandatory disclosures to raise public attention to pay ratios, causing some stakeholders to penalize firms disclosing high pay ratios. Finally, the negative reaction is less pronounced for firms with weakly performance-related CEO compensation, that is, investors expected the disclosure mandate to be less detrimental to firms with inefficient CEO compensation design. This finding suggests that investors believe public pressure resulting from mandatory pay ratio disclosures can influence the compensation-setting process. Together, our findings have implications for policymakers and corporate boards, highlighting investors’ perceptions of the potential consequences of mandatory transparency on within-firm pay inequality.