Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/279418 
Year of Publication: 
2023
Series/Report no.: 
IWH Discussion Papers No. 20/2023
Publisher: 
Halle Institute for Economic Research (IWH), Halle (Saale)
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.
Subjects: 
capital structure
climate finance
information asymmetry
rational in-attention
JEL: 
D82
G11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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