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Do Equity Markets Care about Income Inequality? Evidence from Pay Ratio Disclosure

Yihui Pan, Elena S. Pikulina, Stephan Siegel and Tracy Yue Wang

Journal of Finance, 2022, vol. 77, issue 2, 1371-1411

Abstract: We examine equity markets’ reaction to the first‐time disclosure of the CEO‐worker pay ratio by U.S. public companies in 2018. We find that firms disclosing higher pay ratios experience significantly lower abnormal announcement returns. Firms whose shareholders are more inequality‐averse experience a more negative market response to high pay ratios. Furthermore, during 2018 more inequality‐averse investors rebalance their portfolios away from stocks with a high pay ratio relative to other investors. Our results suggest that equity markets are concerned about high within‐firm pay dispersion, and investors’ inequality aversion is a channel through which high pay ratios negatively affect firm value.

Date: 2022
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