Wage gap and stock returns: Do investors dislike pay inequality?

Green finance and high-pollution corporate compensation - Empirical evidence from green credit guidelines

“…There are two opposing effects of capital deepening on internal wage disparities in businesses. On the one hand, as businesses invest more in innovation, stakeholders become more aware of internal governance, social responsibility, and environmental responsibility [ 25 ], which in turn prevents internal wage disparities from growing [ 8 ]. On the other hand, the increased risks and opportunities will probably strengthen executives' organizational position [ 26 ].…”

“…When it comes to external factors that impact corporate green governance, external stakeholders like suppliers, the public, and investors push businesses to uphold environmental governance standards [ 7 ] and take on social responsibility in order to reduce wage inequality [ 8 ]. Given the growing interest of green investors and other stakeholders in a company's social and environmental responsibility, the “GCG” can potentially convey signals of environmental protection and draw in green investors[ 9 ].…”

Technological greenness and long-run performance

“…In addition to this information processing structure, we also introduce green preferences. Previous research shows that some investors have a pro-social preference for environmentally-friendly firms (e.g., Riedl and Smeets (2017); Barber et al (2021);Dittmann et al (2023)), deriving higher utility from holding green stocks over and above the expected monetary payoff (Pástor et al (2021); Zerbib (2022)). In our setup, such investors belong in the uninformed category (e.g., Riedl and Smeets (2017); Hartzmark and Sussman (2019); Brière and Ramelli (2022)).…”

“…Another recent strand of research shows that some investors, much like the general public, exhibit prosocial preferences. They tend to shun stocks issued by firms whose core business is not considered to be morally sound (Hong and Kacperczyk (2009)), or firms that promote high pay inequality between managers and rank-and-file workers (Pan et al (2022); Dittmann et al (2023)). Such preferences seem especially strong among retail investors and mutual funds (e.g., Riedl and Smeets (2017); Hartzmark and Sussman (2019); Brière and Ramelli (2022)).…”

“…To derive theoretical guidance, we consider the asset pricing model from Hirshleifer and Teoh (2003). We study the pricing of green tech stocks in a setup with arbitrageurs and pro-social investors, where the latter derive nonpecuniary utility from investing in accordance with their social preferences (e.g., Riedl and Smeets (2017); Barber et al (2021); Dittmann et al (2023)), such as green investing (e.g., Zerbib (2022)). We find that when economic fundamentals do not change, the prices of green stocks mainly reflect the green preferences of pro-social investors.…”