Non-compliance in Executive Compensation Disclosure: the Brazilian Experience

We examine the determinants and consequences of firms' choice not to comply with a new executive compensation disclosure regulation. We exploit a unique feature of Brazilian markets, where a change in the regulation of executive compensation disclosure could arguably lead to personal security-related costs for executives. This major reform in executive compensation disclosure in Brazil became effective in December 2009. While some firms complied with the change in regulation, other firms explicitly refused to comply fully with the regulation by using a court injunction. After controlling for firm-specific characteristics and both social and economic inequality measures, we find that the degree of criminality in the state in which the firm is headquartered (a proxy for security-related costs) and the level of CEO compensation are important determinants of a firm's decision not to fully disclose executive compensation information. We also show that firms which do not fully comply with the regulation face costs in the form of higher bid-ask spreads, suggesting investors are leery of the decision not to comply with the regulation. We discuss the potential implications of our results in the context of executive compensation disclosure reform.