Non‐compliance in Executive Compensation Disclosure: the Brazilian Experience

Abstract

We examine the determinants and consequences of firms’ choice not to comply with a new executive compensation disclosure regulation. We exploit a unique feature of Brazilian markets, where a change in the regulation of executive compensation disclosure could arguably lead to personal security‐related costs for executives. This major reform in executive compensation disclosure in Brazil became effective in December 2009. While some firms complied with the change in regulation, other firms explicitly refused to comply fully with the regulation by using a court injunction. After controlling for firm‐specific characteristics and both social and economic inequality measures, we find that the degree of criminality in the state in which the firm is headquartered (a proxy for security‐related costs) and the level of CEO compensation are important determinants of a firm's decision not to fully disclose executive compensation information. We also show that firms which do not fully comply with the regulation face costs in the form of higher bid‐ask spreads, suggesting investors are leery of the decision not to comply with the regulation. We discuss the potential implications of our results in the context of executive compensation disclosure reform.

Perils of limiting the coverage of mandatory pay disclosure: The Korean experience

“…Therefore, we gain a series of results that confirm our hypothesis. Further, our results are consistent with the findings in the existing literature suggesting that an excessive level of pay or high media attention induces executives to either avoid disclosure or comply incompletely (Costa et al., 2016; Robinson et al., 2011).…”

“…First, if high pay gap is an outcome of opportunistic rent attraction, the benefit of director deregistration is expected to strengthen with an increase in the size of the pay gap. This prediction is consistent with the findings of existing studies, which show that incomplete compliance or avoidance is positively associated with the level of pay (Costa et al, 2016;Robinson et al, 2011) or media attention (Byrd, Johnson, & Porter, 1998;Robinson et al, 2011). It is also consistent with the studies that shareholders, the public, and even external auditors react negatively to high pay gaps (Arnold and Grasser, 2018;Crawford, Nelson, and Rountree, 2021;Ge and Kim, 2020;and Hemmings, Hodgkinson, and Williams, 2020).…”

“…First, some firms may explicitly refuse to comply. For example, in 2009, Brazilian companies filed court injunctions against a new rule mandating the disclosure of executive compensation details, alleging increased personal security costs (Barros et al., 2015; Costa et al., 2016).…”

“…By doing so, we add to the existing literature that studies how companies react to the adoption of mandatory disclosure rules. The reactions documented in the literature include explicit refusal (Barros, Di Miceli da Silveira, Bortolon, & Leal, 2015; Costa, Galdi, Motoki, & Sanchez, 2016), incomplete compliance (Robinson, Xue, & Yu, 2011), and self‐serving compliance (Aboody, Barth, & Kasznik, 2006; Faulkender & Yang, 2013; Lewellen, Park, & Ro, 1996; Murphy, 1996; Porac, Wade, & Pollock, 1999).…”

Board of Directors’ Interlocks: A Social Network Analysis Tutorial

“…An extensive part of the information required is filled by the companies manually and there is no validation of the data provided, while some companies have initially refused to comply with executive compensation disclosure by using a court injunction (Costa, Galdi, Motoki, & Sanchez, 2016). These features may contribute to a lack of pattern as well as missing information in the data used by researchers, requiring further procedures and reliability analysis.…”