Trade, Voting, and ESG Policies: Theory and Evidence

Abstract

Environment, social and governance (ESG) policies have become important to many investors. We model the interaction between ESG policy proposals and shareholder trading and voting under different sets of preferences, and we test the predictions of our model in a laboratory experiment. In a first stage, shares are traded with knowledge of the policy costs and benefits. In a second stage, shareholders vote for or against the policy, which yields a positive externality if adopted. In one environment, voter preferences are highly polarized regarding the policy while in a second environment voter preferences are more dispersed, following a uniform distribution. Our experiment reveals that low policy costs generally favor adoption of the policy in both environments, even when rejection is an equilibrium outcome. For intermediate costs, the adoption rate is lower under dispersed preferences than under polarized preferences. In the experiment, share prices are usually well above the equilibrium prediction when the policy is adopted, apparently due to a voting premium. This suggests that the cost to shareholders of adopting ESG policies may be less than anticipated.

Keywords: shareholder voting, social responsibility, ESG, experimental finance

JEL Classification: D74, G34, G11, Q50, C92