Corporate Governance and Executive Perquisites: Evidence from the New SEC Disclosure Rules

Abstract

The Securities and Exchange Commission (SEC) amended its rules on executive compensation disclosure in 2006 to provide more transparent disclosures to investors regarding stealth compensation items (e.g., executive perks and pensions). In order to shed additional light on the mixed results from prior research, we re-examine 608 S&P 1500 firms' 2007 proxy statements to determine if executive perquisites reflect agency problems (Yermack 2006) or whether they serve a legitimate purpose (Rajan and Wulf 2006). Consistent with the agency cost argument, we find that firms with weak corporate governance are more likely to award perquisites to executives. In additional tests, we document that weakly governed firms that hid large amounts of CEO perquisites prior to the new rules experienced a negative market reaction after their proxy statements were released, and that a small number of firms with abnormally high CEO compensation prior to the new rules reduced or eliminated perquisite programs following the new rules. These results suggest that the SEC's expanded disclosure requirements are informative and useful to capital market investors in their attempts to detect the misappropriation of firm resources by weakly governed firms, but that the expanded SEC requirements have been politically costly for some firms.