Mandatory Compensation Disclosure, CFO Pay, and Corporate Reporting Quality

Abstract

We use the SEC’s mandated disclosure rule on CFO pay in 2006 to examine the effect of compensation disclosure on executive pay and corporate financial reporting practices. In a panel of S&P1500 firms, we find that total compensation of the CFO increases dramatically relative to the CEO. The effect is the most salient at firms that never or rarely disclosed CFO pay before 2006. The results cannot be explained by enhanced monitoring of shareholders. We also find more negative unexpected earnings and deteriorated financial reporting quality in these firms after 2006. CFO (but not CEO) turnover increases significantly.