CEO-Worker Pay Ratio and Prosocial Preferences
Starting in 2018, U.S. public companies are required to disclose the ratio of CEO to median worker pay, providing researchers the first opportunity to examine equity markets’ reaction to within-firm pay dispersion. Using data from firms’ proxy filings, we document that the disclosure of pay ratio, and of median worker pay in particular, attracted significant media attention and market reaction. Firms with higher pay ratios and lower median worker pay tend to experience a more negative market reaction around the disclosure. The market response is more pronounced for larger firms, while for smaller firms the stock market reaction depends on local prosocial policies and preferences in firms’ headquarters states. Finally, we find that during 2018 actively-managed U.S. equity mutual funds overall, and those with stronger emphasis on fair treatment of employees in particular, rebalance their portfolios away from firms with high pay ratio. Overall, our results suggest that concerns about income disparity have an important impact on capital markets.