Wage Gap and Stock Returns Do Investors Dislike Pay Inequality

Ingolf Dittmann, Maurizio Montone, Yuhao Zhu

2022 | Academic | Investor Behavior, Risk & Performance

We find that the mispricing of the wage gap is driven by limits to arbitrage. Specifically, some 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.