Within-Firm Pay Inequality and Payout Policies

This paper examines CEO behavior in response to within-firm pay inequality. Using CEO-median employee pay ratio data mandated by the SEC, the study reveals that following the release of pay ratio disclosures, CEOs with higher pay ratios tend to issue higher dividend payments as a strategy to mitigate adverse reactions from investors and the market than those with lower pay ratios. This positive correlation between CEO pay ratios and dividend payouts is consistently observed on both yearly and quarterly basis. Additionally, CEOs with higher pay ratios tend to raise their dividend payments in the subsequent year. The positive relationship between CEO pay ratio and dividend payouts remains robust when taking into account various firm characteristics and external shocks such as the COVID-19 pandemic. Furthermore, I employ instrumental variable regression analysis, subsample analysis, alternative measures analysis, and omitted variables analysis to validate the findings. On the other hand, the results indicate that CEO pay ratio does not significantly impact stock repurchases, as this relationship is sensitive to exogenous shocks, and stock repurchases are susceptible to potential shareholder base loss. The comprehensive analysis conducted in this paper highlights the significance of CEO pay ratio in influencing dividend payout decisions while shedding light on the limited impact of such ratio on stock repurchases. The results contribute to the understanding of CEO behavior and its implications for corporate financial policies and shareholder responses