The Impact of Pay Ratio Disclosures on Investors’ Reactions to CEOs’ Public Attributions for Poor Performance

• In Event: Investor Reactions to Management Disclosures

Abstract

When financial performance is poor, CEOs often provide performance attributions (causal explanations) in accounting disclosures. We investigate how the presence of the newly-mandated pay ratio disclosure—the ratio of annual CEO compensation to median employee compensation—influences how investors react to a CEO’s choice of internal attribution (self-attribution versus attribution to other firm employees). By increasing the salience of other firm employees’ responsibilities and contributions, we expect the presence of the pay ratio to lessen investors’ natural, negative response to a CEO blaming other firm employees (relative to accepting personal responsibility). As expected, results of an experiment demonstrate that investors more favorably view the CEO’s character, the CEO’s responsibility for poor performance, and the firm’s future profitability when the CEO attributes negative firm performance to non-CEO employees in the presence (versus absence) of the new pay ratio disclosure. Our results inform firm managers about the impact of their attributions for poor firm performance and regulators about potential unintended consequences of pay ratio disclosure on investors’ perceptions of the CEO and the firm.

Authors

• Nicole Cade, University of Pittsburgh

• Steve Kaplan, Arizona State University - Tempe

• Serena Loftus, Tulane University