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

Ingolf Dittmann A · Maurizio Montone · Yuhao Zhu

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Abstract

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 limits to arbitrage. Specifically, some investors seem to bid up low-wage-gap stocks for non-monetary reasons, thus exhibiting a preference for low pay-inequality. The results suggest that firms with equitable pay schemes are rewarded with a lower cost of capital.

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References

1997On Persistence in Mutual Fund Performance 1999A Theory of Fairness, Competition, and Cooperation 2006Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 2014A five-factor asset pricing model 2006Investor Sentiment and the Cross‐Section of Stock Returns 2003Corporate Governance and Equity Prices 2000ERC: A Theory of Equity, Reciprocity, and Competition 2003Liquidity Risk and Expected Stock Returns

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