Private firm disclosure and public firm pay-for-performance sensitivity : international evidence

Abstract

This paper examines whether and how private firm disclosure affects public firms’ executive compensation contracting. Using data from 32 countries between 2000 and 2020, we find that disclosures by private peer firms significantly increase a public firm’s pay-for-performance sensitivity, suggesting that the accounting earnings of public firms become more informative when private firms disclose more. To further establish causality, we use the staggered implementation of electronic business registers as a plausibly exogenous shock; thereafter, we continue to find a positive link between private firm disclosures and public firms’ pay-for-performance sensitivity. We then conduct several cross-sectional analyses in support of the earnings informativeness view. We find that the impact of private firm disclosures is more pronounced for firms with higher information asymmetry, higher production uncertainty, and fewer alternative information sources. Overall, in documenting the externality of private firm disclosures on public firms’ incentive intensity, we add new evidence on the benefits of private firm disclosures.