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Do Equity Markets Care about Income Inequality? Evidence from Pay Ratio Disclosure

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  • YIHUI PAN
  • ELENA S. PIKULINA
  • STEPHAN SIEGEL
  • TRACY YUE WANG

Abstract

We examine equity markets’ reaction to the first‐time disclosure of the CEO‐worker pay ratio by U.S. public companies in 2018. We find that firms disclosing higher pay ratios experience significantly lower abnormal announcement returns. Firms whose shareholders are more inequality‐averse experience a more negative market response to high pay ratios. Furthermore, during 2018 more inequality‐averse investors rebalance their portfolios away from stocks with a high pay ratio relative to other investors. Our results suggest that equity markets are concerned about high within‐firm pay dispersion, and investors’ inequality aversion is a channel through which high pay ratios negatively affect firm value.

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  • Yihui Pan & Elena S. Pikulina & Stephan Siegel & Tracy Yue Wang, 2022. "Do Equity Markets Care about Income Inequality? Evidence from Pay Ratio Disclosure," Journal of Finance, American Finance Association, vol. 77(2), pages 1371-1411, April.
    • Handle: RePEc:bla:jfinan:v:77:y:2022:i:2:p:1371-1411
    DOI: 10.1111/jofi.13113
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    2. Dittmann, Ingolf & Montone, Maurizio & Zhu, Yuhao, 2023. "Wage gap and stock returns: Do investors dislike pay inequality?," Journal of Corporate Finance, Elsevier, vol. 78(C).
    3. Ye, Miaomiao & Li, Mengzhe & Zeng, Qiannan, 2022. "Former CEO director and executive-employee pay gap," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    4. Edmans, Alex & Gosling, Tom & Jenter, Dirk, 2023. "CEO compensation: Evidence from the field," Journal of Financial Economics, Elsevier, vol. 150(3).
    5. Afzali, Aaron & Oxelheim, Lars & Randøy, Trond & Paulo Vieito, João, 2023. "The Impact of Relative CEO Pay on Employee Productivity," Working Paper Series 1458, Research Institute of Industrial Economics.
    6. Li, Rui & Xu, Shoufu & Zhang, Yun, 2023. "Can digital transformation reduce within-firm pay inequality? Evidence from China," Economic Modelling, Elsevier, vol. 129(C).
    7. Davide Lauria & W. Brent Lindquist & Stefan Mittnik & Svetlozar T. Rachev, 2022. "ESG-Valued Portfolio Optimization and Dynamic Asset Pricing," Papers 2206.02854, arXiv.org.
    8. Brownen-Trinh, Ruby & Orujov, Ayan, 2023. "Corporate socio-political activism and retail investors: Evidence from the Black Lives Matter campaign," Journal of Corporate Finance, Elsevier, vol. 80(C).

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