The Economic Effects of Mandating Expanded Compensation Disclosures

This paper analyzes the effects of mandating expanded, management compensation disclosures on compensation levels, cross-sectional and within-firm pay dispersion, and manager turnover. For identification, I use the introduction of the Compensation Discussion and Analysis (CD&A) in the 2007 proxy season, a significant expansion in the required disclosures related to compensation. The design uses the timing of the introduction date to compare manager pay at firms with and without the disclosure in a difference-in-differences analysis. I find evidence that disclosures are associated with increasing compensation. I corroborate this finding with the partial rollback of the CD&A allowed by the Jumpstart Our Business Startups Act in 2012. The CD&A introduction is associated with increases in pay dispersion, consistent with reduced compensation committee flexibility that increases payout risk to managers. From cross-sectional tests, compensation increases and turnover are higher for managers with shorter tenure and at smaller firms, consistent with these disclosures enhancing the job prospects of lesser-known managers. Entrenched and powerful managers do not have incremental pay increases with disclosures, inconsistent with expanded disclosures enabling rent extraction.