Wall Street's attitude toward the CEO-to-employee pay ratio: Evidence from M&As

Using U.S. M&A announcement events, we attempt to understand the market’s attitude towards CEO-to-employee pay-ratio. In a sample of 707 M&A events between 2018-2021, we find that acquirers’ M&A announcement returns are positively associated with their CEO-to-employee pay-ratio. Our findings are robust to utilizing variation in Minimum Wage across acquirer headquarters states as an instrument and in using Heckman sample selection correction. These findings support the optimal contracting view that the market likely perceives the size of pay-ratio as an outcome of boards’ pursuit to recruit and retain the best CEOs. For aptly talented and able CEOs, firms likely offer disproportionately higher pay premiums in the competitive CEO labor market pushing up the pay-ratio.