The effects of executive compensation disclosure in countries with weak legal protection

Purpose This research examines the impact of mandatory executive compensation disclosure on firm risk and liquidity in countries characterized by weak legal protection. Design/methodology/approach Adopting a quasi-experimental approach, the study uses the difference-in-differences method, treating the mandatory disclosure of executive compensation as an exogenous shock in firms from countries rooted in French civil law (Argentina, Belgium, Brazil, Spain and Italy). Findings The main results indicate that mandatory disclosure of executive remuneration is associated with lower market risk in Brazilian, Spanish and Italian companies and with lower liquidity in Belgian and Brazilian companies. These results suggest that mandatory disclosure coincides with a reduction in perceived external risk and discourages opportunistic financial decisions regarding resource and cash management in contexts of weak legal protection. Originality/value Our findings support the view that transparency in executive compensation can deter executives from engaging in overly risky projects, facilitating more informed shareholder assessments of project risk levels. Additionally, stringent disclosure requirements for executive pay are associated with lower liquidity levels in firms, which can mitigate agency issues related to cash resource decisions. This study contributes novel empirical insights into the relationship between mandatory compensation disclosure and both risk and liquidity in firms from countries with weak legal protection.