Green investing, information asymmetry, and capital structure

Shasha Li and Biao Yang

No 20/2023, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We investigate how optimal attention allocation of green-motivated investors changes information asymmetry in financial markets and thus affects firms' financing costs. To guide our empirical analysis, we propose a model where investors with heterogeneous green preferences endogenously allocate limited attention to learn market-level or firm-specific fundamental shocks. We find that a higher fraction of green investors in the market leads to higher aggregate attention to green firms. This reduces the information asymmetry of green firms, leading to higher price informativeness and lower leverage. Moreover, the information asymmetry of brown firms and the market increases with the share of green investors. Therefore, greater green attention is associated with less market efficiency. We provide empirical evidence to support our model predictions using U.S. data. Our paper shows how the growing demand for sustainable investing shifts investors' attention and benefits eco-friendly firms.

Keywords: capital structure; climate finance; information asymmetry; rational in-attention (search for similar items in EconPapers)
JEL-codes: D82 G11 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cfn, nep-env, nep-inv and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:202023

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