Both sides of the CEO-to-employee pay ratio: evidence from the COVID-19 pandemic

Purpose Given that pay ratios did not decline following the Dodd-Frank disclosure mandate, we investigate how investors interpret these disclosures across normal and crisis periods. Exploiting the Coronavirus disease 2019 (COVID-19) pandemic to highlight variation in managerial talent and ability, we assess whether high pay ratios reflect efficient contracting or managerial opportunism and examine links to performance and chief executive officer (CEO) power. Design/methodology/approach We examine market reaction to CEO-to-employee pay ratio disclosures for S&P 1500 firms for 2018–2021. Using the COVID-19 pandemic as a macroeconomic shock, we define the event date as the Definitive Proxy Statement (Schedule 14A) (DEF 14A) filing and estimate a panel model with firm fixed effects. We control for firm, CEO, and industry characteristics and incorporate both traditional and social media sentiments as additional controls for the broader information environment surrounding proxy filings. Cross-sectional and robustness tests further distinguish between optimal contracting and rent-extraction explanations. Findings While announcement-period returns were negatively associated with pay ratios in 2018, this relation weakens and disappears during the COVID-19 period. This evidence is consistent with the possibility that investors place relatively greater weight on managerial ability considerations during the COVID-19 period, although the event-study design does not fully isolate the pay ratio component from other contemporaneous proxy disclosures. Firms with higher pay ratios exhibit stronger operating performance and higher valuation, particularly during the pandemic. Positive market reactions remain strongest in large firms and in firms with weaker CEO power. Originality/value This paper is the first to examine market reactions to pay ratio disclosures during the COVID-19 shock, providing a setting that sharpens identification between competing theories. It also links pay ratio levels to broader issues of employee treatment and within-firm inequality, offering a novel and integrated perspective on what high pay ratios reveal about managerial ability and firm dynamics.