Wage gap and stock returns: Do investors dislike pay inequality?
Dittmann, Ingolf; Montone, Maurizio; Zhu, Yuhao
(2023) Journal of Corporate Finance, volume 78, pp. 1 - 36
(Article)
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
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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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Keywords: Asymmetric mispricing, Inequality aversion, Stock returns, Wage gap, Business and International Management, Finance, Economics and Econometrics, Strategy and Management
ISSN: 0929-1199
Publisher: Elsevier
Note: Funding Information: We thank Kristine Hankins (the Editor), two anonymous referees, Yakov Amihud, Nelson Camanho, William Forbes, Marc Gabarro, Juan-Pedro Gómez, Bharat Sarath, Esad Smajlbegovic, Geoffrey Tate, Walter Torous, Martijn van den Assem, Fernando Zapatero, and seminar participants at the Workshop on Corporate Governance and Investment at Oslo Metropolitan University, the Global Finance Conference at the ESSCA School of Management in Paris, the IFABS Asia Ningbo China Conference, the IFABS Corporate Finance Conference at the University of Oxford, the Finance Forum at Universitat Pompeu Fabra in Barcelona, the Behavioral Finance Working Group Conference at Queen Mary University of London, the Israel Behavioral Finance Conference at Tel Aviv University, and the Erasmus Finance brown bag for many insightful comments. We are grateful to Manfred Antoni, Benjamin Wirth, and Britta Gehrke for their precious help with data work at the German Federal Employment Agency. We acknowledge financial support from NWO through a Vici grant. Funding Information: We thank Kristine Hankins (the Editor), two anonymous referees, Yakov Amihud, Nelson Camanho, William Forbes, Marc Gabarro, Juan-Pedro Gómez, Bharat Sarath, Esad Smajlbegovic, Geoffrey Tate, Walter Torous, Martijn van den Assem, Fernando Zapatero, and seminar participants at the Workshop on Corporate Governance and Investment at Oslo Metropolitan University, the Global Finance Conference at the ESSCA School of Management in Paris, the IFABS Asia Ningbo China Conference, the IFABS Corporate Finance Conference at the University of Oxford, the Finance Forum at Universitat Pompeu Fabra in Barcelona, the Behavioral Finance Working Group Conference at Queen Mary University of London, the Israel Behavioral Finance Conference at Tel Aviv University, and the Erasmus Finance brown bag for many insightful comments. We are grateful to Manfred Antoni, Benjamin Wirth, and Britta Gehrke for their precious help with data work at the German Federal Employment Agency. We acknowledge financial support from NWO through a Vici grant. Publisher Copyright: © 2022 The Author(s)
(Peer reviewed)
