Three Essays on the Regulation of Executive Compensation

Executive pay increased severely over the last decades, especially compared to the average employee pay, prompting governments to add new regulations related to executive compensation. To examine how executive pay regulation affects firm value and future firm performance, I exploit recent regulations in the United States and Germany. I present my findings in three papers in this thesis. The first and second papers focus on the CEO pay ratio disclosure mandate introduced in the United States. In the first paper, I examine how investors perceive the implementation of the CEO pay ratio disclosure mandate. I find that investors believe that disclosing high ratios puts firms at a competitive disadvantage and draws attention to their vertical pay inequality. In the second paper, I examine how the level of disclosed pay ratio affects the firm's market value and future firm performance. The results show that investors perceive high pay disparity based on compensation that is not linked to economic factors as detrimental to firm performance. However, the results show that a high vertical pay disparity does not negatively affect firm value when the pay disparity can be explained by economic factors. In particular, the results show that such firms will perform better in the future. In the third paper, I examine how investors perceive a German regulation that forces firms to set a cap on executive compensation. The results show that, on average, investors fear that capping executive compensation will hurt firm value. However, the results of the firm-level analysis show that investors expect different outcomes for firms depending on the ex ante level of abnormal pay and vertical pay disparities. Overall, my work contributes to understanding how investors perceive executive compensation regulation and provides valuable insights for policymakers.