The Effects of Corporate Governance, Competition, and Political Costs on Strategic Executive Pay Disclosure: Evidence from Korea

Abstract

We examine factors influencing firms' strategic disclosure of executive pay in Korea. In Korea, executive pay is disclosed through directors' pay disclosure in a firm's annual report. Because the disclosure rules in Korea do not mandate but only recommend that firms distinguish between inside executive directors and outside nonexecutive directors when reporting the average pay of directors, this regulatory policy provides a unique opportunity to examine managers' incentives to opportunistically manage the disclosed levels of average executive pay. We find that strategic disclosure for cloaking executive pay prevails when firms have weak corporate governance and high (low) political costs of disclosing high levels of executive pay (making strategic disclosures), but that such disclosure is not associated with proprietary costs. Furthermore, using the subsample of firms that can choose between different types of strategic disclosures, we examine whether firms base their choice on the political costs of making the strategic disclosures. In our data setting, there are two major ways of strategically managing the disclosed average executive pay downward: (1) deliberate aggregation of inside and outside director pay in the calculation of average director pay, and (2) inclusion of part-time inside directors who receive a minimal or substantially low level of pay (which, of the two schemes, is the less visible). Our results suggest that the higher the political costs of a firm's strategic disclosures are, the less visible the firm's cloaking of executive pay will be. Data Availability: Data are available from public sources identified in the text.

Does board gender diversity affect the transparency of corporate political disclosure?

“…Third, this study demonstrates that the CPD transparency framework operationalized in this study is fully consistent with prior research on the determinants of other types of non-financial disclosure (e.g. environmental disclosure or CSR disclosure) (see Hyun et al, 2014). The CPD data set and the CPD transparency framework developed and tested in this study can be utilized by future researchers to examine other impacts of CPD transparency, for example, its impact on debt or equity capital markets.…”

“…To test the hypothesis, models of the determinants of the transparency of political contribution disclosure are constructed based on a framework developed by Hyun et al (2014). This framework suggests that transparency in voluntary non-financial disclosure depends on corporate governance, proprietary cost and political cost.…”

“…Following Eng and Mak (2003) and Hyun et al (2014), this study controls for the effects of firm visibility, operational performance and leverage on political costs. First, it is noted that larger firms are likely to draw greater attention from stakeholders, and this motivates them to be more transparent.…”

The effects of politically connected outside directors on firm performance: Evidence from Korean chaebol firms

“…Hence, the number of observations for Exec_Pay and Od_Pay in Table 1 is much smaller than 1480. See Hyun et al (2014) for details of Korean firms' strategic executive pay disclosure. 4 Outside directors are generally appointed at an annual shareholders' meeting, which tends to be held within 3 months of the fiscal year end (e.g., March 31).…”

“…Board characteristics (i.e., ln(Board_Size) and Board_Independence) correlate significantly with firm size (Size). This correlation can be partly explained by Korea's unique regulatory requirements for board composition and independence based on firm size(Hyun, Kim, Kwon, & Shin, 2014).Panel B presents the annual change in Tobin's q for Oricom, an advertising agency in the Doosan business group. Between 2005 and 2006, the Doosan group, including Oricom, was under investigation by NTS (National Tax Service), and the group attempted to hire a formal regulator or a legal officer as an outside director to minimize the damage from the investigation.…”