Investor responses to additional information related to pay-ratio disclosures.

• In Event: Investor Response to Risk Indicators

Abstract

The SEC provides companies with considerable flexibility in the disclosure of the ratio between CEO and median employee compensation (pay-ratio). Using an experiment, I find that providing information about CEO and other highly paid executives’ education and experience (additional information) in the pay-ratio disclosure increases nonprofessional investors’ support for executive compensation (SoP). Drawing on research in psychology, I predict that additional information increases investors’ perceptions of meritocracy especially when the pay-ratio is higher than the industry benchmark which helps investors rationalize the compensation gap made salient by the pay-ratio. I find that investors’ perceptions of meritocracy positively influence their SoP support. Finally, I find that SoP support is positively related to investors’ investment decisions. My findings provide evidence that the content of the pay-ratio disclosure apart from the disclosure itself could systematically affect investor decisions.

Author

• Anish Shankar Menon, Prairie View A&M University