Investor perception of salary history bans adoption in the United States

Abstract

To crack down on pay disparities, the U.S. government is increasingly adopting mandatory salary history bans (SHBs) that restrict employers from soliciting salary history information from job applicants. I examine how investors perceive the passage of SHBs using an event study approach. Across all events associated with the passage of SHBs, I find an average negative cumulative abnormal return of -0.72%, suggesting that shareholders interpret the introduction of SHBs as costly for companies. This aligns with the notion that SHBs could elevate labor costs, introduce information asymmetry and adverse selection in the labor markets, thus diminishing efficient labor investment. Cross-sectional variation tests suggest that the negative market reaction is more pronounced among firms with higher labor-related costs, higher human capital intensity, less efficient labor investment, and those operating in more competitive labor and product markets prior to the adoption of SHBs. Furthermore, I examine the ex post effect of SHBs on firm performance using a difference-in-differences design. Consistent with the negative perception of investors, I find that treated firms exhibit a significantly greater decline in both operating and financial performance compared to control firms following the implementation of SHBs. Overall, the results shed light on the unintended capital consequences of SHBs.