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Wage Gap and Stock Returns: Do Investors Dislike Pay Inequality?

European Corporate Governance Institute – Finance Working Paper No. 727/2021

60 Pages Posted: 18 Aug 2018 Last revised: 2 May 2022

See all articles by Ingolf Dittmann

Ingolf Dittmann

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM); European Corporate Governance Institute (ECGI)

Maurizio Montone

Utrecht University

Yuhao Zhu

Erasmus University Rotterdam (EUR)

Date Written: April 27, 2022

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 unsophisticated traders. Specifically, these 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.

Keywords: Wage Gap, Stock Returns, Asymmetric Information, Inequality Aversion

JEL Classification: G10, G12, G14, G32

Suggested Citation

Dittmann, Ingolf and Montone, Maurizio and Zhu, Yuhao, Wage Gap and Stock Returns: Do Investors Dislike Pay Inequality? (April 27, 2022). European Corporate Governance Institute – Finance Working Paper No. 727/2021, Available at SSRN: https://ssrn.com/abstract=3226225 or http://dx.doi.org/10.2139/ssrn.3226225

Ingolf Dittmann (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 4081283 (Phone)
+31 10 4089165 (Fax)

HOME PAGE: http://people.few.eur.nl/dittmann/

Tinbergen Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Maurizio Montone

Utrecht University ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Yuhao Zhu

Erasmus University Rotterdam (EUR)

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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