High CEO pay in the United States has fueled repeated calls for enhanced disclosure of chief executives’ compensation. For example, in 2015 the SEC received over 285,000 comment letters supporting its proposed rule to require disclosure of CEO-employee pay ratios. Yet, it is unclear how more disclosure would affect pay. For example, Hermalin and Weisbach (2012) show theoretically that greater disclosure increases executive pay because of the additional costs imposed on executives, and Murphy and Jensen (2018) point out that disclosure regulations over the past century have done little to curb the growth of CEO pay. Nevertheless, other scholars suggest that greater disclosure can reduce managerial rent extraction via “stealth” pay like stock options or deferred compensation or shame CEOs into potentially lowering their pay (Bebchuk and Fried, 2003; Morse, Nanda, and Seru, 2011).
In a new paper, we investigate how new information technologies, changed the level and structure of CEO pay by significantly reducing the cost of accessing corporate disclosures for a broad range of investors and the general public. We also study whether the changes in pay benefitted the shareholders.
We focus on the SEC’s introduction of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) platform which facilitated investor access to corporate filings in electronic form. Before EDGAR, it was possible but costly to access firm filings, such as 10-K, 10-Q, 8-K, or DEF 14A forms, because investors either had to pay a fee to subscribe to the services of commercial data providers or physically visit one of the three SEC’s reference rooms in Chicago, New York, or Washington DC. In 1993, the SEC announced a plan to require all public U.S. companies to file their mandatory disclosures electronically through the EDGAR system, with the registered firms joining EDGAR in 10 separate waves between April 1993 and May 1996. The implementation of EDGAR made it significantly easier to get timely firm-specific information and had a profound effect on information production by market participants (Gao and Huang, 2020; Goldstein, Yang, and Zuo, 2023).
To understand how the introduction of EDGAR affected public discussion of CEO pay, we first investigate the media coverage of executive compensation by major business-news outlets (Wall Street Journal, New York Times, Financial Times, and USA Today). Using the staggered difference-in-differences design around the implementation of EDGAR from 1993 to 1996, we find that the number of executive compensation articles about firms increases significantly after these firms join the EDGAR system and start posting their filings electronically. Further, the articles become more detailed and, on average, more negative, suggesting greater overall scrutiny of executive compensation.
Perhaps not surprisingly, we find that enhanced disclosure through EDGAR curbs CEO pay. Firms that are required to post their filings report 7-10 percent lower total annual CEO pay. One interpretation of these results is that information technologies allowed shareholders to significantly revise their beliefs about firms’ pay practices, resulting in more informed decisions, pressure on boards, and lower CEO pay. Alternatively, enhanced disclosure could have prompted labor unions, employee and consumer groups, and the media, to publicly shame highly-paid CEOs and pressure firms to lower their CEOs’ pay, even if it were to the detriment of their shareholders.
Consistent with the idea that disclosure of exceptionally large compensation packages provokes public shaming, we find that the effect of disclosure increases with the level of reported CEO pay. For example, for CEOs in the top quartile of compensation distribution, pay drops by approximately 17-20 percent after the implementation of EDGAR, whereas for CEOs in the bottom quartile, there is no effect. Further, we find that the pay of executives other than CEOs is largely unaffected by the introduction of EDGAR, except for those in the top quartile of compensation distribution, whose pay declines by 11-13 percent. These results may reflect the fact that lower-ranked executives typically lack the celebrity status of CEOs, making their compensation less interesting to the media and the public.
When looking into the components of CEO pay, we find that salary and cash-incentive pay are unaffected by EDGAR implementation, but there is a sharp decline in equity-based incentive pay, consistent with more negative press coverage of CEO incentive-based awards (Core, Guay, and Larcker, 2008; Kuhnen and Niessen, 2012). Accordingly, we find that the observed changes in CEO compensation mix are reflected in lower CEO compensation incentives.
From the policy perspective, an important question is whether changes in CEO pay that are triggered by the introduction EDGAR benefit shareholders. We first document that enhanced corporate disclosure has a likely unintended effect on CEO turnover. Specifically, CEO turnover increases by approximately 4-5 percent following EDGAR introduction, and most of the increase is from voluntary turnover. This evidence suggests that enhanced disclosure makes it easier for CEOs to search for jobs at other public firms or perhaps motivates them to move to private firms, where the disclosure requirements are less strict.
Further, we find that firm value, measured by equity market-to-book ratios or firms’ total q, is negatively related to EDGAR-induced increases in CEO turnover and decreases in CEO incentives. These results suggest that, although greater disclosure can facilitate access to information and help rein in CEO pay, there may be negative consequences for shareholders. Overall, our evidence is more consistent with greater politicization and media coverage of CEO pay, facilitated by enhanced disclosure and the view that disclosure regulations can reduce the efficacy of pay. The results also support the theoretical predictions of Hermalin and Weisbach (2012) that, if it is not politically feasible for firms to increase executive compensation, greater disclosure can lead to increases in CEO turnover and decreases in firm value.
Bebchuk, Lucian Arye, and Jesse M. Fried, 2003, Executive compensation as an agency problem, Journal of Economic Perspectives 17, 71-92.
Core, John E., Wayne Guay, and David F. Larcker, 2008, The power of the pen and executive compensation, Journal of Financial Economics 88, 1-25.
Gao, Meng, and Jiekun Huang, 2020, Informing the market: The effect of modern information technologies on information production, Review of Financial Studies 33, 1367-1411.
Hermalin, Benjamin E., and Michael S. Weisbach, 2012, Information disclosure and corporate governance, Journal of Finance 67, 195-233.
Goldstein, Itay, Shijie Yang, and Luo Zuo, 2023, The real effects of modern information technologies: Evidence from the EDGAR implementation, Journal of Accounting Research, forthcoming.
Kuhnen, Camelia M., and Alexandra Niessen, 2012, Public opinion and executive compensation, Management Science 58, 1249-1272.
Murphy, Kevin J., and Michael Jensen, 2018, The politics of pay: The unintended consequences of regulating executive compensation, USC Law Legal Studies Paper 18-8.
Morse, Adair, Vikram Nanda, and Amit Seru, 2011, Are incentive contracts rigged by powerful CEOs? Journal of Finance 66, 1779-1821.
This post comes to us from Ilona Babenko at Arizona State University’s W. P. Carey School of Business, Benjamin Bennett at Tulane University’s A. B. Freeman School of Business, and Zexi Wang at Lancaster University’s Management School. It is based on their recent paper, “Does Enhanced Disclosure Curb CEO Pay? Evidence from a Modern Information Technology Improvement,” available here.