Finance Series
Sustainable Investing and Market Governance
Working Paper Author/Authors
Stockholm School of Economics
Deeksha Gupta
Johns Hopkins University
Alvin Chen
Stockholm School of Economics
Key Finding
Pro-social investors obfuscate price signals, creating agency costs that paradoxically incentivize reducing negative externalities
Abstract
This paper examines how sustainable investing affects the governance role of financial markets. We show that stronger concerns about externalities among informed investors can reduce price informativeness about managerial effort to improve financial performance, increasing the cost of incentive provision. This mechanism creates an inherent link between firms' environmental and social (ES) and governance quality. We show that the agency costs of sustainable investing can have real effects on ES outcomes when firms can affect their externalities.
