Does the U.S. equity market still value pay ratio disclosures?
No Thumbnail Available
Journal Title
Journal ISSN
Volume Title
School of Business |
Master's thesis
Author
Date
2024
Department
Major/Subject
Mcode
Degree programme
Accounting
Language
en
Pages
70+11
Series
Abstract
In response to growing concerns about income inequality in the United States, Congress mandated the “the pay ratio rule”, requiring public U.S. companies to disclose the ratio of total CEO compensation to the wages of the median employee on an annual basis. The enactment was met with criticism and claims of the ratio being immaterial to investors. Although recent literature has found that the U.S equity market reacted negatively to the first-ever regulated disclosure of these ratios in 2018, little attention has been paid to whether the market still cares about them years down the line. With a sample of 559 pay ratio disclosures concerning fiscal years 2021 and 2022 from a total of 342 S&P 500 companies, this study investigates whether they are still viable and relevant to the equity market. This matter is assessed by identifying whether the pay ratio information continues to induce stock price reactions. The event study methodology is used to identify concurrent abnormal returns, which are then investigated with univariate analyses and cross-sectional regressions. In the process, this study sheds light on how the market perceives varying levels of vertical pay disparity, and whether investors conflate CEO pay ratios with the level of CEO pay. Finally, this study examines whether the market incorporates annual intra-company pay ratio changes, showcasing how diligently the market follows these disclosures. The results demonstrate that the market reacted positively to exceptionally high pay ratios in the short term. However, a robust and all-encompassing linear relationship is not found. The findings indicate that the market does not substantially conflate the pay ratios with CEO pay, supporting the ratio’s viability. Finally, this study documents a positive market reaction to annual intra-company pay ratio changes, regardless of whether the pay ratios increased or decreased. As with the pay ratios, this relationship is somewhat driven by the more substantial changes observed. Overall, the results of this study suggest that the market continues to value pay ratio disclosures.Description
Thesis advisor
Beyer, BiancaKeywords
CEO pay ratio, event study, disclosure, market reaction, pay disparity
