A study forthcoming in Contemporary Accounting Research examined executive compensation disclosure rules and their effect on pay practices in corporations, finding the rules can have important – and sometimes unintended – consequences.
“People generally think that more disclosure and transparency are always better,” explained David Weinbaum, associate professor of finance at Syracuse University’s Martin J. Whitman School of Management, one of the study’s co-authors. “We show that this is not necessarily the case when it comes to executive compensation: mandating disclosure is costly and can have unintended consequences.”
Professor Weinbaum and his co-authors, Yaniv Grinstein (Cornell University) and Nir Yehuda, University of Texas at Dallas), find that transparency can be a negative for the company and its shareholders. For example, companies that found their competitors were offering more significant perks ended up matching or exceeding those perks in subsequent years.
The study cited Warren Buffett who once said, “American shareholders are paying a significant price because they get to look at that proxy statement each year” essentially because “no CEO looks at a proxy statement and comes away saying I should be paid less.”
Although, some companies could pay a price, the researchers found disclosure regulations also have a positive effect because they offer enhanced monitoring for executive compensation packages, allowing for greater investor scrutiny.
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