Impacts of CEO-employee pay disparity on investor behavior and market dynamics: Evidence from laboratory asset markets

Xiaolan Yang, Jiaqi Wang and Shu Chen

China Economic Review, 2024, vol. 88, issue C

Abstract: This study explores the impacts of CEO-to-employee pay disparity on investor behavior and market dynamics using an experimental methodology. We employed two laboratory asset markets with identical company valuations but differing CEO-employee pay ratios. Our findings reveal that a higher pay ratio leads investors to quote higher prices for the company's stock. This effect is driven by two conflicting mechanisms of social preference: inequality aversion, which motivates investors who value fairness to quote lower prices for stocks of companies with high pay ratios, and social comparison, where the high pay ratio prompts investors to compare their wealth with that of CEOs, thus becoming more risk-seeking and quoting higher prices. Moreover, higher pay ratios contribute to increased stock prices, fostering larger market bubbles, enhancing the dispersion of investor opinions, boosting trading volumes, and escalating market volatility. This study enriches our understanding of how asset markets react to CEO-to-employee pay disparities, providing valuable insights for policymakers and market participants.

Keywords: CEO-employee pay disparity; Asset market; Inequality aversion; Social comparison; Investor dispersion (search for similar items in EconPapers)
JEL-codes: G12 G38 G41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:88:y:2024:i:c:s1043951x24001718

DOI: 10.1016/j.chieco.2024.102282

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