Wage Gap and Stock Returns: Do Investors Dislike Pay Inequality?
45 Pages Posted: 18 Aug 2018 Last revised: 1 Jul 2021
Date Written: June 1, 2021
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 exhibit a preference for low pay-inequality, as they irrationally bid up the prices of low-wage-gap stocks. 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: Suggested Citation