Li, Y.Cheong, C.S.Canil, J.2025-06-032025-06-032024Finance Research Letters, 2024; 67:105761-1-105761-91544-61231544-6131https://hdl.handle.net/2440/144896This paper investigates the impact of CEO-to-median employee pay ratios on labor investment efficiency. Drawing on competing predictions from Talent Assignment Theory and Equity Theory, we examine how pay disparity between CEOs and average workers influences suboptimal investment in labor (labeled inefficient investment in labor). Our analysis finds a significant negative relationship between pay ratios and inefficient investment in labor, suggesting firms with higher CEO compensation exhibit more balanced labor investments. This challenges Equity Theory, which hypothesizes that large intra-firm pay gaps cause perceived unfairness and underinvestment in labor. Overall, the study provides novel evidence on how CEO pay practices shape employee behaviors and factor inputs. The findings contribute to ongoing debates regarding the economic implications of CEO compensation, particularly in optimizing human capital efficiency.en© 2024 The Author(s). Published by Elsevier Inc. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).CEO-employee pay ratio; Labor investment efficiency; Talent assignment theory; Equity theoryJournal article10.1016/j.frl.2024.1057612024-10-15701726Li, Y. [0000-0002-1096-7325]Cheong, C.S. [0000-0001-8120-0167]Canil, J. [0000-0002-3646-4320]