In a new paper, we examine whether SEC comment letters on deficiencies in compensation disclosure have an impact on executive-compensation “contract efficiency,” meaning the extent to which such contracts align with shareholder interest. The goal of comment letters is not to change firms’ compensation contract design but to make sure that compensation details are disclosed in compliance with securities regulations so that shareholders are informed. We posit, however, that these letters indirectly influence compensation contract design by improving disclosure.

Improved disclosure can lead to changes in compensation contracts because better-informed market participants strengthen market discipline. In fact, one of the … Read more