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 :

February 04 2021
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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 wage gap is incorrectly priced only by unsophisticated traders. We also show that some of these investors seem to exhibit a preference for low pay inequality, which decreases the cost of capital for firms that adopt equitable pay schemes.

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Authors

Real name:
Maurizio Montone
Real name:
Yuhao Zhu