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CEO-employee pay disparity, risk-taking incentives, and financial reporting choices

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  • Dai, Han
  • Robinson, Dahlia
  • Shen, Yi

Abstract

Section 953b of the Dodd-Frank Act mandates the disclosure of CEO-employee pay ratios for public companies beginning in fiscal year 2017. Using hand-collected data on CEO-employee pay ratios, we investigate the association between CEO-employee pay disparity and risk-taking behaviors at both the executive and firm levels. We find that higher pay ratios are associated with greater CEO risk-taking incentives, less conservative financial reporting, more frequent merger and acquisition activities, and marginally higher risk disclosure on 10-K filings. Robustness tests and heterogeneity analyses reveal stronger effects in firms with weaker governance, lower transparency, male CEOs, and less R&D-intensive environments. We also show that the SEC’s 2017 mandatory pay ratio disclosure rule significantly reduced CEO Vega, suggesting that transparency may constrain CEO’s risk-taking incentives. Our findings highlight the behavioral implications of internal pay inequality and provide important insights into how compensation structure shapes executive incentives and corporate decision-making.

Suggested Citation

  • Dai, Han & Robinson, Dahlia & Shen, Yi, 2025. "CEO-employee pay disparity, risk-taking incentives, and financial reporting choices," Journal of Financial Stability, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:finsta:v:81:y:2025:i:c:s1572308925001056
    DOI: 10.1016/j.jfs.2025.101476
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