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Sustainable investing and market governance

Author

Listed:
  • Chen, Alvin
  • Gupta, Deeksha
  • Starmans, Jan

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.

Suggested Citation

  • Chen, Alvin & Gupta, Deeksha & Starmans, Jan, 2026. "Sustainable investing and market governance," Journal of Financial Economics, Elsevier, vol. 181(C).
    • Handle: RePEc:eee:jfinec:v:181:y:2026:i:c:s0304405x26000449
    DOI: 10.1016/j.jfineco.2026.104273
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    Keywords

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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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