Why Do Firms Utilize the Flexibility Allowed in CEO-Employee Pay Ratio Disclosure? Evidence from Dodd-Frank Act Section 953 (b)

Abstract

Section 953 (b) of the Dodd-Frank Act requires all listed firms to disclose a CEO-employee pay ratio. Firms are given the flexibility to use permitted discretions in their required pay ratio calculation and to disclose a supplementary pay ratio if necessary. We analyze the CEO-employee pay ratio disclosure of S&P 1500 firms with fiscal year-ends from December 31, 2017, through December 31, 2018. We find that both informational and opportunistic motives affect firms' supplementary pay ratio disclosure, while informational motives appear to dominate firms' use of permitted discretions. Firms consider political costs when utilizing the flexibility in the pay ratio disclosure. Firms with labor market signaling incentives disclose a supplementary pay ratio that is higher than the required pay ratio. The supplementary pay ratio, when issued, captures a firm's economic pay disparity better than the required pay ratio and is positively associated with subsequent firm performance.