Within-firm pay inequality and payout policies

This paper examines CEO behavior in response to within-firm pay inequality. Using CEO median employee pay ratio data mandated by the SEC, the study reveals that following the release of pay ratio disclosures, CEOs with higher pay ratios tend to issue higher dividend payments as a strategy to mitigate adverse reactions from the investors and market than those with lower pay ratios. The positive correlation between CEO pay ratio and dividend payouts is consistently observed on both yearly and quarterly basis. The relationship between CEO pay ratio and dividend payouts remains robust when taking into account various firm characteristics and external shocks such as the COVID-19 pandemic and overall market condition. Furthermore, we employ instrumental variable regression analysis, subsample analysis, alternative measures analysis, and omitted variables analysis to validate the findings. On the other hand, the results indicate that CEO pay ratio does not significantly impact stock repurchases, as the decision of stock repurchases is sensitive to exogenous shocks, and stock repurchases lead to potential shareholder base loss.