Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform

66 Pages Posted: 24 Oct 2019 Last revised: 8 Dec 2021

See all articles by Wonjae Chang

Wonjae Chang

SUNY at Buffalo - School of Management

Michael Dambra

SUNY at Buffalo - School of Management

Bryce Schonberger

University of Colorado at Boulder - Leeds School of Business

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management; Korea University Business School (KUBS)

Date Written: December 7, 2021

Abstract

Beginning in 2018, U.S. public firms were required to report the ratio of the chief executive officer’s (CEO) compensation to their median employee’s compensation in the annual proxy statement. Exploiting the staggered reporting of pay ratios, we find little evidence that total CEO compensation changes in response to pay ratio disclosure reform. However, we do find that boards significantly adjust the mix of compensation awarded by reducing the sensitivity of CEO pay to equity price changes, particularly when the CEO is likely to garner media scrutiny, and by reducing reliance on stock-based and other compensation components that are most susceptible to media coverage surrounding the pay ratio disclosure. Firms ultimately disclosing higher pay ratios garner more media coverage around the filing of their proxy statement, and more negative-toned coverage in the subsequent month. Firms with compensation-related media coverage also display negative abnormal returns around their proxy filing dates. Finally, we find evidence that greater pay disparity is associated with greater selling activity by retail investors and more negative say-on-pay votes following pay ratio reform, suggesting a broad set of investors responds to public scrutiny resulting from pay ratio disclosures.

The internet appendix for this paper is available at the following URL:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3979898

Keywords: CEO compensation, pay ratio, disclosure, pay-for-performance, media coverage

JEL Classification: G34, G38, M12, M52

Suggested Citation

Chang, Wonjae and Dambra, Michael and Schonberger, Bryce and Suk, Inho, Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform (December 7, 2021). Available at SSRN: https://ssrn.com/abstract=3470215 or http://dx.doi.org/10.2139/ssrn.3470215

Wonjae Chang

SUNY at Buffalo - School of Management ( email )

3435 Main Street
Buffalo, NY 14214
United States

Michael Dambra (Contact Author)

SUNY at Buffalo - School of Management ( email )

350 Jacobs Management Center
Buffalo, NY 14260-1660
United States
716-645-3237 (Phone)

Bryce Schonberger

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management ( email )

342 Jacobs Management Center
Buffalo, NY 14260-4000
United States
716-645-3215 (Phone)

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

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