Say-on-Pay Laws and Financial Reporting Quality Around the World: Evidence from a Natural Experiment

Chang He; Haina Shi; Gaoguang (Stephen) Zhou; Xindong (Kevin) Zhu

doi:10.2308/JIAR-2022-050

Say-on-Pay Laws and Financial Reporting Quality Around the World: Evidence from a Natural Experiment

Chang He
, Haina Shi^*
, Gaoguang (Stephen) Zhou
, Xindong (Kevin) Zhu

^*Corresponding author for this work

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

Abstract

In response to criticisms of executive pay policies, say-on-pay (SoP) laws have been adopted worldwide. However, evidence on the effectiveness of these laws remains inconclusive. This study examines the effect of SoP laws on financial reporting quality (FRQ) by employing a shock-based research design. Using a large sample of firms from 34 economies from 2000 through 2019, we document a significant improvement in FRQ after the adoption of SoP laws, suggesting increased monitoring on financial reporting. In addition, our cross-sectional analyses show that the improvement in FRQ is more pronounced for firms with strong demand for better FRQ or with corporate governance mechanisms that enable effective monitoring. Taken together, our findings support the monitoring effect of SoP laws and suggest that improved FRQ may be an unintended benefit of SoP laws. © 2025 American Accounting Association. All rights reserved.

Original language	English
Pages (from-to)	47-70
Journal	Journal of International Accounting Research
Volume	24
Issue number	1
Online published	Aug 2024
DOIs	https://doi.org/10.2308/JIAR-2022-050
Publication status	Published - 2025

Funding

We thank Jeong-Bon Kim, Byron Song, Song Tang, and the participants at Fudan University and City University of Hong Kong for their constructive comments. We are grateful for the constructive comments from Linda A. Myers (editor) and two anonymous referees. The authors are grateful for the research assistance from Zhenwen He. All authors contributed equally. Gaoguang Zhou acknowledges financial support by General Research Fund (GRF) from the Research Grants Council of Hong Kong (RGC) [12501918]. Haina Shi acknowledges financial support from the National Natural Science Foundation of China [Grant No. 72372028]. Chang He and Xindong (Kevin) Zhu have no financial conflicts of interest related to this research.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 10 Reduced Inequalities

Research Keywords

corporate governance
executive compensation
financial reporting quality
say-on-pay

Publisher's Copyright Statement

COPYRIGHT TERMS OF DEPOSITED FINAL PUBLISHED VERSION FILE: Chang He, Haina Shi, Gaoguang Zhou, Xindong Zhu; Say-on-Pay Laws and Financial Reporting Quality Around the World: Evidence from a Natural Experiment. Journal of International Accounting Research 1 March 2025; 24 (1): 47–70. https://doi.org/10.2308/JIAR-2022-050

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RGC-funded

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title = "Say-on-Pay Laws and Financial Reporting Quality Around the World: Evidence from a Natural Experiment",

abstract = "In response to criticisms of executive pay policies, say-on-pay (SoP) laws have been adopted worldwide. However, evidence on the effectiveness of these laws remains inconclusive. This study examines the effect of SoP laws on financial reporting quality (FRQ) by employing a shock-based research design. Using a large sample of firms from 34 economies from 2000 through 2019, we document a significant improvement in FRQ after the adoption of SoP laws, suggesting increased monitoring on financial reporting. In addition, our cross-sectional analyses show that the improvement in FRQ is more pronounced for firms with strong demand for better FRQ or with corporate governance mechanisms that enable effective monitoring. Taken together, our findings support the monitoring effect of SoP laws and suggest that improved FRQ may be an unintended benefit of SoP laws. {\textcopyright} 2025 American Accounting Association. All rights reserved.",

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T2 - Evidence from a Natural Experiment

AU - He, Chang

AU - Shi, Haina

AU - Zhou, Gaoguang (Stephen)

AU - Zhu, Xindong (Kevin)

PY - 2025

Y1 - 2025

N2 - In response to criticisms of executive pay policies, say-on-pay (SoP) laws have been adopted worldwide. However, evidence on the effectiveness of these laws remains inconclusive. This study examines the effect of SoP laws on financial reporting quality (FRQ) by employing a shock-based research design. Using a large sample of firms from 34 economies from 2000 through 2019, we document a significant improvement in FRQ after the adoption of SoP laws, suggesting increased monitoring on financial reporting. In addition, our cross-sectional analyses show that the improvement in FRQ is more pronounced for firms with strong demand for better FRQ or with corporate governance mechanisms that enable effective monitoring. Taken together, our findings support the monitoring effect of SoP laws and suggest that improved FRQ may be an unintended benefit of SoP laws. © 2025 American Accounting Association. All rights reserved.

AB - In response to criticisms of executive pay policies, say-on-pay (SoP) laws have been adopted worldwide. However, evidence on the effectiveness of these laws remains inconclusive. This study examines the effect of SoP laws on financial reporting quality (FRQ) by employing a shock-based research design. Using a large sample of firms from 34 economies from 2000 through 2019, we document a significant improvement in FRQ after the adoption of SoP laws, suggesting increased monitoring on financial reporting. In addition, our cross-sectional analyses show that the improvement in FRQ is more pronounced for firms with strong demand for better FRQ or with corporate governance mechanisms that enable effective monitoring. Taken together, our findings support the monitoring effect of SoP laws and suggest that improved FRQ may be an unintended benefit of SoP laws. © 2025 American Accounting Association. All rights reserved.

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KW - executive compensation

KW - financial reporting quality

KW - say-on-pay

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DO - 10.2308/JIAR-2022-050

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Say-on-Pay Laws and Financial Reporting Quality Around the World: Evidence from a Natural Experiment

Abstract

Funding

UN SDGs

Research Keywords

Publisher's Copyright Statement

RGC Funding Information

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