Trade, Voting, and ESG Policies: Theory and Evidence

We model the interaction between shareholder trading and voting on an ESG policy under different sets of preferences, and then test equilibrium predictions of the model in the laboratory. The model suggests, and laboratory results confirm, that low policy costs favor policy adoption and that intermediate costs lead to a lower rate of policy adoption under dispersed preferences than under polarized preferences. Observed share prices are higher than equilibrium predictions when the policy is adopted. This suggests that incumbent shareholders' capital loss when adopting ESG policies may be less than anticipated.

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