Determinants of voluntary disclosure of executive compensation practices by boards of directors

This study examines how corporate boards respond to investor demands for information on executive compensation practices and what factors are associated with the extent of disclosures made by boards. It investigates whether management's disclosure preference, directors' reputations, directors' stock ownership, and stakeholders' concerns are associated with the extent of compensation practice disclosures reported in proxy statements. Unlike other disclosure studies, this study examines disclosures as an outcome of board decisions rather than management decisions. It shows the first evidence that better board governance (e.g., board independence and number of other directorships as proxies for directors' reputations) is associated with greater communication about board practices to shareholders.; I constructed a comprehensive checklist of 23 compensation-related items. The disclosure items, if reported, could improve shareholders' understanding on how boards determine executive compensation and whether boards use pay-for-performance principles in setting compensation. Boards reported, on average, thirty-two percent of the total disclosure items in 1993, the first year boards were required to issue a compensation report. The majority of firms, 62%, reported more items in 2002 than they did in 1993.; I find that overpaid managers prefer less transparency and use their influence to limit board disclosure. I also find that the percentage of independent outside directors on boards is positively associated with the number of reported items in 1993, suggesting that independent directors, because their reputations are at stake, are likely to respond to incentives provided by the director labor market. In a temporal analysis, I show that directors' reputations and ownership by outside directors have become more effective incentives for directors to act in the best interests of shareholders. Contrary to my expectation, CEO and inside directors' stock ownership are not positively associated disclosure scores. More specifically, CEOs with significant ownership who serve as board chairmen are more likely to curb the amount of disclosure. Finally, I find little evidence that my proxies for stakeholder concerns about compensation practices are positively associated with disclosure.