Pricing Investor Impact

Abstract

This paper presents a microfounded asset pricing model in a production economy with an externality. The model challenges conventional wisdom as unsystematic risks, supply-side effects and the potential for investor impact on the externality are all priced. Optimal investor policy depends on `contribution multipliers' which determine the amount of firm assets generated by a $1 increase in investor demand. Calibration to existing empirical results suggests average contribution multipliers of 3%, but with large potential cross-sectional variation. This implies significant opportunities for positive investor impact, but also for net harm to welfare if demand shifts are too aggressive. The model highlights directions for future empirical research.

Keywords: Impact investment, supply and demand curves, Investor impact, Investor contribution, Enterprise impact, ESG, Greenhouse gas emissions, Impact Frontier

JEL Classification: C3, G11, G12, G30, H41