The Principal-Agent Problem within Sustainable Investing

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Reference

Kimmerle, H. P. (2019). The Principal-Agent Problem within Sustainable Investing. In New Challenges of Economic and Business Development 2019: Incentives for Sustainable Economic Growth, Conference Proceedings (pp. 400-409). Riga.

Publication type

Paper in Conference Proceedings

Abstract

Recent studies show the positive impact ofsustainability factors within the investment process. Mostly these studies concentrate on performance effects while disregarding existing agency problems. In this paper we deal with the principal-agent problem within sustainable investing, as corporate executives (agents) try to maximize their personal utility at the cost of investors (principals). We examine how adverse selection and moral hazard can be mitigated by signalling and monitoring mechanisms and how effective these are. The results indicate that sustainability reportings and ESG ratings can visualize company’s sustainability efforts and reduce ex ante information asymmetries. However, we find evidence that reports and ratings are not standardized and not easily accessible. To reduce ex post asymmetries, we propose specific incentive-type contracts for corporate executives to participate in a sustainable development, albeit lacking standardized performance measures.

Persons

Organizational Units

  • Institute for Financial Services
  • Chair in Business Administration, Banking and Financial Management

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