Using new data on S&P 1500 firms’ chief executive officer (CEO)‐to‐employee pay ratios disclosed by mandate of Section 953(b) of the Dodd–Frank Act, we examine the effect of within‐firm pay inequality on bond yield spreads. We find a significant negative relation between industry‐adjusted CEO‐to‐employee pay ratio and yield spreads while controlling for covariates and endogeneity. This result is strongest in financially constrained, labor‐intensive, and small‐to‐medium‐sized firms. The evidence supports the incentive‐provision explanation of CEO‐to‐employee pay disparity, reflecting efficient CEO compensation rather than rent extraction. We also document selection bias in self‐reported pay ratios, highlighting the efficacy of the Dodd–Frank provisions.
Available at: http://works.bepress.com/katsiaryna_salaveibardos/14/
© 2021 The Eastern Finance Association
This is the peer reviewed version of the following article: Bardos, Katsiaryna, Steven E. Kozlowski, and Michael R. Puleo. "Entrenchment or efficiency? CEO‐to‐employee pay ratio and the cost of debt." The Financial Review 56, No. 3 (2021): 511-533. https://doi.org/10.1111/fire.12256, which has been published in final form at https://doi.org/10.1111/fire.12256. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.