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

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

Ingolf Dittmann, Maurizio Montone, Yuhao Zhu

Series number :

Serial Number: 
727/2021

Date posted :

February 04 2021

Last revised :

July 02 2021
SSRN Share

Keywords

  • Wage gap • 
  • stock returns • 
  • asymmetric information • 
  • inequality aversion

Recent research shows that a high wage-gap between managers and workers identifies better-performing firms, but the stock market does not seem to price this information. In this paper, we show that not all investors neglect pay inequality.

Using a unique data set on German firms' employee compensation, we find that the mispricing of the wage gap is driven by unsophisticated traders. Specifically, these investors seem to exhibit a preference for low pay-inequality, as they irrationally bid up the prices of low-wage-gap stocks. The results suggest that firms with equitable pay schemes are rewarded with a lower cost of capital.

Authors

Real name:
Maurizio Montone
Real name:
Yuhao Zhu