Sustainable investing and market governance
Alvin Chen, Deeksha Gupta, Jan Starmans
Journal of Financial Economics · 2026 · Volume 181
DOI: 10.1016/j.jfineco.2026.104273
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 change their externalities.
Keywords
Agency costs, Corporate governance, Divestment, ESG, Managerial incentives, Market monitoring, Price informativeness, Sustainable investing
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