Financial regulators and investors have expressed concerns about high pay inequality within firms. Using a proprietary data set of public and private firms, this paper shows that firms with higher pay inequality—relative wage differentials between top- and bottom-level jobs—are larger and have higher valuations and stronger operating performance. Based on the data that firms with higher pay inequality exhibit larger equity returns and greater earnings surprises, pay inequality is not necessarily fully priced by the market. Our results support the notion that differences in pay inequality across firms are a reflection of differences in managerial talent.
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