Impact of pay disparities between chief executive officers and chief financial officers on corporate financial and investment policies

We study whether and how pay disparities between chief executive officers (CEOs) and chief financial officers (CFOs) affect corporate policies. Consistent with the tournament theory, we find a positive association between the CEO–CFO pay disparity and aggressiveness in corporate financial and investment policies. Specifically, a firm with a large CEO–CFO pay disparity tends to have an aggressive capital structure and tilt toward high-risk investments. Furthermore, we test the impact of the CEO–CFO pay disparity on firm value and show that the pay disparity is positively associated with firm value. Overall, we conclude that CEO–CFO pay disparities provide CFOs with tournament incentives to not only adopt aggressive corporate policies but also select better investment projects. Our research highlights the career-enhancing and value-creating effects of CEO–CFO pay disparities as well as the important role of CFOs’ incentives on the treasurer side of their duties.