Executive Compensation Disclosure and Private Control Benefits: A Comparison of U.S. And Canadian Dual Class Firms

Abstract

Prior research on the cross-country variation of accounting choices induced by managerial incentives to extract private benefits is limited in its use of accounting measures that have limited empirical correlations with direct estimates of private control benefits. This study attempts to resolve the void in the literature by using a measure of compensation disclosure that is directly correlated with excess compensation - one form of private control benefits. The evidence shows that compensation disclosure choices induced by separating control rights from cash flow rights in dual class firms is stronger in a weaker investor protection environment. This is contrary to prior research which has documented a weaker relation in weaker investor protection environments. The evidence in this study is consistent with the explanation that a weaker investor protection environment magnifies the agency costs of dual class equity inducing firms to increase disclosure in an attempt to mitigate these increased agency costs. Based on prior literature, Canada and the U.S. are used to proxy for weak and strong investor protection environments respectively. This study also sheds light on the role of institutional investors in influencing executive compensation disclosure. The presence of an institutional blockholder greatly enhances the quality of executive compensation disclosure.