Equity market reaction to the Securities and Exchange Commission (SEC) corporate disclosure: executive compensation

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Akumaning, Edward
University of Lethbridge. Dhillon School of Business
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Lethbridge, Alta. : University of Lethbridge, Dhillon School of Business
Corporate disclosure is crucial for corporate governance as it reduces information asymmetry, misalignment of investors’ interests, and other agency costs. Therefore, the US Security and Exchange Commission (SEC) has adopted various disclosure regulations to provide investors and other stakeholders with more transparent and comparable information about executive compensation. This quantitative study seeks to expand the body of knowledge by adopting an event study methodology to explore the stock market reaction to increased corporate disclosure of executive pay for US public firms. The population of this research comprises American-listed firms from 2021-2022. I employ a final sample of 2,914 firms for the complete sample analysis. Applying Zellner’s Seemingly Unrelated Regression (SUR) methodology, I provide evidence that the equity market reacts positively to all the news announcements, giving rise to the 2022 SEC’s final executive compensation disclosure rules adopted on August 25, 2022. This positive market response confirms the prediction that increased compensation disclosure improves governance. The results also suggest that enhanced corporate disclosure increases shareholder value by reducing agency costs linked to information asymmetry. In addition, the positive daily abnormal returns tend to be stronger for small firms versus large ones for the initial publication and the final rules. This suggests that small firms have more information asymmetry, uncertainty, and risks and thus react more positively than large companies that likely have less information asymmetry and uncertainty.
Corporate governance , Executive compensation , Agency theory , Seemingly unrelated regression (SUR) , Information disclosure , Asymmetry information