The Effect of Accessibility of Status-Confirming Information on Investor Reactions to the Pay-Ratio Disclosure
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Author(s)
Menon, Anish
Advisor(s)
Rupar, Kathy
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Abstract
The SEC provides companies with considerable flexibility in the disclosure of the ratio between CEO and median employee compensation (pay-ratio). Prior research suggests that pay-ratio disclosures negatively affect investors’ support for executive compensation (SoP). Using two experiments, I find that accessibility of information that helps justify the gap between CEO and median employee compensation (status-confirming information) increases nonprofessional investors’ support for executive compensation (SoP support). Drawing on research in psychology, in experiment 1, I predict that accessibility of status-confirming information increases investors’ perceptions of meritocracy especially when the pay-ratio is higher than the peer companies 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. However, accessibility of status-confirming information does not increase perceptions of meritocracy when pay-ratio is higher than peer companies. Additional analysis reveals that accessibility of status-confirming information does not significantly increase SoP support and perceptions of meritocracy in higher income participants’, suggesting that participants income levels could potentially affect their evaluation of the pay-ratio disclosure when status-confirming information is accessible.
Since the analysis including income levels was conducted ex-post in Experiment 1, I conduct a second experiment to confirm my findings. In Experiment 2 I investigate whether participants’ perceptions of wealth impact their responses when the pay ratio is higher than peer companies. I find that investors’ perceptions of wealth and accessibility of status-confirming information affect both investors’ perceptions of meritocracy and SoP support when pay-ratio is higher than peer companies. Together, my findings provide evidence that the content of the pay-ratio disclosure apart from the disclosure itself could systematically affect investor decisions.
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Date
2022-07-29
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Dissertation