Do Equity Markets Care about Income Inequality? Evidence from Pay Ratio Disclosure

We examine equity markets’ reaction to the first-time disclosure of the CEO-worker pay ratio by U.S. public companies in 2018. We find that firms disclosing higher pay ratios experience significantly lower abnormal announcement returns. Firms whose shareholders are more inequality-averse experience a more negative market response to high pay ratios. Furthermore, during 2018 more inequality-averse investors rebalance their portfolios away from stocks with a high pay ratio relative to other investors. Our results suggest that equity markets are concerned about high within-firm pay dispersion, and investors’ inequality aversion is a channel through which high pay ratios negatively affect firm value.