Entrenchment or Efficiency? CEO-to-Employee Pay Ratio and the Cost of Debt

Katsiaryna Salavei Bardos; Steven E. Kozlowski; Michael R. Puleo

doi:10.1111/fire.12256

Entrenchment or Efficiency? CEO-to-Employee Pay Ratio and the Cost of Debt

Katsiaryna Salavei Bardos, Steven E. Kozlowski, Michael R. Puleo

Fairfield University

Fairfield University

Research output: Contribution to journal › Article › peer-review

Abstract

<p> Using new data on S&P 1500 firms’ chief executive officer (CEO)&hyphen;to&hyphen;employee pay ratios disclosed by mandate of Section 953(b) of the Dodd–Frank Act, we examine the effect of within&hyphen;firm pay inequality on bond yield spreads. We find a significant negative relation between industry&hyphen;adjusted CEO&hyphen;to&hyphen;employee pay ratio and yield spreads while controlling for covariates and endogeneity. This result is strongest in financially constrained, labor&hyphen;intensive, and small&hyphen;to&hyphen;medium&hyphen;sized firms. The evidence supports the incentive&hyphen;provision explanation of CEO&hyphen;to&hyphen;employee pay disparity, reflecting efficient CEO compensation rather than rent extraction. We also document selection bias in self&hyphen;reported pay ratios, highlighting the efficacy of the Dodd–Frank provisions.</p>

Original language	American English
Journal	The Financial Review
Volume	56
DOIs	https://doi.org/10.1111/fire.12256
State	Published - Feb 1 2021

Keywords

cost of debt
Dodd-Frank Act
executive compensation
pay disparity

Disciplines

Business

Access to Document

10.1111/fire.12256License: CC BY

Entrenchment or Efficiency CEO-to-Employee Pay Ratio and the CosFinal published version, 398 KBLicense: CC BY
Entrenchment or Efficiency CEO-to-Employee Pay Ratio and the CosFinal published version, 398 KBLicense: CC BY

Cite this

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title = "Entrenchment or Efficiency? CEO-to-Employee Pay Ratio and the Cost of Debt",

abstract = " Using new data on S\&P 1500 firms\’ chief executive officer (CEO)\&hyphen;to\&hyphen;employee pay ratios disclosed by mandate of Section 953(b) of the Dodd\–Frank Act, we examine the effect of within\&hyphen;firm pay inequality on bond yield spreads. We find a significant negative relation between industry\&hyphen;adjusted CEO\&hyphen;to\&hyphen;employee pay ratio and yield spreads while controlling for covariates and endogeneity. This result is strongest in financially constrained, labor\&hyphen;intensive, and small\&hyphen;to\&hyphen;medium\&hyphen;sized firms. The evidence supports the incentive\&hyphen;provision explanation of CEO\&hyphen;to\&hyphen;employee pay disparity, reflecting efficient CEO compensation rather than rent extraction. We also document selection bias in self\&hyphen;reported pay ratios, highlighting the efficacy of the Dodd\–Frank provisions.",

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doi = "10.1111/fire.12256",

language = "American English",

volume = "56",

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AU - Salavei Bardos, Katsiaryna

AU - Kozlowski, Steven E.

AU - Puleo, Michael R.

PY - 2021/2/1

Y1 - 2021/2/1

N2 - Using new data on S&P 1500 firms’ chief executive officer (CEO)&hyphen;to&hyphen;employee pay ratios disclosed by mandate of Section 953(b) of the Dodd–Frank Act, we examine the effect of within&hyphen;firm pay inequality on bond yield spreads. We find a significant negative relation between industry&hyphen;adjusted CEO&hyphen;to&hyphen;employee pay ratio and yield spreads while controlling for covariates and endogeneity. This result is strongest in financially constrained, labor&hyphen;intensive, and small&hyphen;to&hyphen;medium&hyphen;sized firms. The evidence supports the incentive&hyphen;provision explanation of CEO&hyphen;to&hyphen;employee pay disparity, reflecting efficient CEO compensation rather than rent extraction. We also document selection bias in self&hyphen;reported pay ratios, highlighting the efficacy of the Dodd–Frank provisions.

AB - Using new data on S&P 1500 firms’ chief executive officer (CEO)&hyphen;to&hyphen;employee pay ratios disclosed by mandate of Section 953(b) of the Dodd–Frank Act, we examine the effect of within&hyphen;firm pay inequality on bond yield spreads. We find a significant negative relation between industry&hyphen;adjusted CEO&hyphen;to&hyphen;employee pay ratio and yield spreads while controlling for covariates and endogeneity. This result is strongest in financially constrained, labor&hyphen;intensive, and small&hyphen;to&hyphen;medium&hyphen;sized firms. The evidence supports the incentive&hyphen;provision explanation of CEO&hyphen;to&hyphen;employee pay disparity, reflecting efficient CEO compensation rather than rent extraction. We also document selection bias in self&hyphen;reported pay ratios, highlighting the efficacy of the Dodd–Frank provisions.

KW - cost of debt

KW - Dodd-Frank Act

KW - executive compensation

KW - pay disparity

UR - https://digitalcommons.fairfield.edu/business-facultypubs/242

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M3 - Article

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ER -

Entrenchment or Efficiency? CEO-to-Employee Pay Ratio and the Cost of Debt

Abstract

Keywords

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