Do Repurchases Facilitate Shareholder Exit? Evidence from CEO Pay Ratio Disclosure

The Essex Finance Centre (EFiC) warmly invites you to join the research seminar with Professor Amedeo De Cesari from the Alliance Manchester Business School.

We examine whether managers influence dissenting shareholders’ choice between voice and exit by facilitating exit through share repurchases. We exploit the mandatory disclosure of CEO-to-median employee pay ratio, which exposed inequality and prompted socially conscious investors to decide between activism or divestment. We then leverage two sources of variation in this disclosure’s impact: staggered initial disclosure timing and pay ratio relative to peers.

In the months after initial disclosures, high-pay-ratio firms increase repurchases 34% more than peer low-pay-ratio firms, which promotes the exit of socially conscious short-term investors. Furthermore, firms that repurchase after disclosing high pay ratios neither substantially adjust pay ratios nor face more future proposals related to CEO compensation or from socially conscious investors.

Overall, our results suggest that firms use repurchases to facilitate shareholder exit, thus promoting manager-shareholder alignment and obviating the need to revise contentious corporate policies. Our findings cast doubts upon the effectiveness of the mandate in promoting pay equity within firms.