Two essays on the impact of regulatory changes on corporate decisions

Abstract

This thesis consists of two essays, each focusing on the impact of one particular regulatory change on corporate compensation design and voluntary disclosure, respectively.

In the first essay, I posit that highly-paid CEOs are susceptible to online harassment or even threats as the public becomes increasingly concerned about income inequality, implying that cyberbullying might function as an external force to refrain the CEO-employee pay disparity since CEOs care about their personal image in the eyes of society at large and their personal reputation in the neighborhood. This positing suggests that the implementation of cyberbullying laws, which aim to prohibit insulting and threatening individuals through the internet, could unintentionally leads to an increase in corporate pay disparity, proxied by CEO-employee pay ratio, by mitigating highly-paid CEOs’ concern about being publicly named, criticized and insulted on the internet. Using the staggered adoption of state cyberbullying laws, I find an increase in the CEO-employee pay ratio for those firms that are affected by the newly-adopted cyberbullying laws. The increase in the pay disparity is more pronounced for firms located in the states with better cyber environment as proxied by cyber infrastructure and cyber users’ education, for firms located in the states with a higher sanction intensity of cyberbullying or located in a “red state,” and for firms with weak corporate governance on CEO compensation. I conduct a series of additional analyses to show the robustness of the main conclusions and the evidence lend credence to my inference that cyberbullying laws drive up the corporate pay disparity as one unintentional consequence.

My second essay examines the pilot program under the Foreign Corruption Practices Act (FCPA) in 2016, which provides managers an option to self-disclose overseas misconduct with an up to 50% penalty exemption. Such a program implies a reduced disclose cost for any disclosed internal control failures. With a lower cost of disclosure, I expect that firms under this FCPA pilot program would be more willing to make voluntary disclosures after the program is adopted. Consistent with my expectation, treatment firms that are subject to this pilot program make more earnings forecasts. The increase in voluntary disclosure is more pronounced for firms that have higher corruption exposure overseas or more exposure to foreign business, and for firms with easier transnational communication and higher institutional ownership. Collectively, the findings are consistent with the notion that with the reduced litigation risk for disclosed internal control failures, managers strategically increase the voluntary disclosure to facilitate managerial learning about potential internal control weakness.