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

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