We examine the potential unintended repercussions of the Securities and Exchange Commission’s 2017 mandate requiring public companies to disclose the CEO pay ratio, specifically its effect on aggressive financial reporting. We propose that CEOs, in an effort to rationalize substantial pay, may engage in manipulative reporting practices. Employing a difference-in-differences design with a sample of 4,245 observations from 746 firms in the U.S. over 2014–2019, we uncover a correlation between higher pay ratios and increased income-inflating behavior post-disclosure. This behavior escalates under conditions of pronounced say-on-pay dissent and limited CEO labor market mobility. A further test shows that aggressive reporting weakens the adverse link between pay ratios and subsequent employee performance, supporting its effectiveness as a managerial response. This research sheds light on the multifaceted consequences of pay ratio disclosure, thereby deepening our understanding of the policy’s impacts.
He et al. (Wed,) studied this question.