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

37 Pages Posted: 18 Aug 2018 Last revised: 14 Sep 2019

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: September 1, 2018

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 wage gap is incorrectly priced only by unsophisticated traders. We also show that some of these investors seem to exhibit a preference for low pay inequality, which decreases the cost of capital for firms that adopt equitable pay schemes.

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? (September 1, 2018). 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 ECARES ULB CP 114
B-1050 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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