Comprehensive Disclosure of Compensation and Firm Value: The Case of Policy Reforms in an Emerging Market

Abstract

We set out in this study to examine the market value of comprehensive disclosure of information relating to compensation paid to directors and executives. It is argued that firms with higher levels of board independence would self-select to provide comprehensive disclosure of compensation, thereby leading to lower agency conflicts. Since the authority in Taiwan adopted a policy of gradual enforcement of compensation disclosure, firms are provided with discretion with regard to any greater levels of transparency that they may choose to provide. We therefore exploit this unique natural experimental setting to examine the effects of compensation disclosure on market value. The evidence indicates that the market provides a higher valuation only to those firms which elect to voluntarily disclose comprehensive information on their compensation practices. However, we also find that even where such disclosure is in excess of the minimum mandatory requirements, lower levels of transparency in the overall disclosure of compensation practices are of very little help with regard to creating market value.

Keywords: compensation information, comprehensive disclosure, agency conflict, board independence, self-selection bias

JEL Classification: G3, G38