Perils of limiting the coverage of mandatory pay disclosure: The Korean experience

In 2013, Korea adopted a mandatory pay disclosure rule applicable only to board members paid above a certain threshold (KRW 500 million, roughly equal to USD 5 million). In this study, we find evidence of Korean executives avoiding disclosure through director deregistration, that is, stepping down from the board, but retaining a non-registered executive position in the same company. This tendency is stronger when deregistration cost is low (in case of family executives), and benefit is high (in case of high executive-to-worker pay ratios). We also find that family executives choose pay cuts over deregistration as means of avoidance when their income loss from pay cuts is relatively low. Last, we find that disclosure avoidance prompts negative share price reactions, leads to higher dividend payouts (in case of large pay cuts) and results in smaller board sizes (in case of family deregistration).