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Impacts of CEO-employee pay disparity on investor behavior and market dynamics: Evidence from laboratory asset markets

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  • Yang, Xiaolan
  • Wang, Jiaqi
  • Chen, Shu

Abstract

This study explores the impacts of CEO-to-employee pay disparity on investor behavior and market dynamics using an experimental methodology. We employed two laboratory asset markets with identical company valuations but differing CEO-employee pay ratios. Our findings reveal that a higher pay ratio leads investors to quote higher prices for the company's stock. This effect is driven by two conflicting mechanisms of social preference: inequality aversion, which motivates investors who value fairness to quote lower prices for stocks of companies with high pay ratios, and social comparison, where the high pay ratio prompts investors to compare their wealth with that of CEOs, thus becoming more risk-seeking and quoting higher prices. Moreover, higher pay ratios contribute to increased stock prices, fostering larger market bubbles, enhancing the dispersion of investor opinions, boosting trading volumes, and escalating market volatility. This study enriches our understanding of how asset markets react to CEO-to-employee pay disparities, providing valuable insights for policymakers and market participants.

Suggested Citation

  • Yang, Xiaolan & Wang, Jiaqi & Chen, Shu, 2024. "Impacts of CEO-employee pay disparity on investor behavior and market dynamics: Evidence from laboratory asset markets," China Economic Review, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:chieco:v:88:y:2024:i:c:s1043951x24001718
    DOI: 10.1016/j.chieco.2024.102282
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    More about this item

    Keywords

    CEO-employee pay disparity; Asset market; Inequality aversion; Social comparison; Investor dispersion;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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