Shareholder Disagreement and Firm Performance: Evidence from ESG Divergence

Abstract

The growing importance of environmental, social, and governance (ESG) issues has led to divergent shareholder preferences, resulting in disagreements that challenge Fisher’s separation theorem by introducing non-pecuniary considerations into investment decisions. Such disagreements may enhance firm performance by increasing shareholder engagement, which provides managers with more comprehensive information for decision-making and improves monitoring quality. Using proxy voting records from mutual and pension funds, I construct novel measures of fund-level environmental and social (ES) preferences and quantify shareholder disagreement at the firm level. I provide evidence that firm-level shareholder ES disagreement is positively associated with firm performance, particularly among smaller, younger firms and those with below-average profiles. Exploiting fund mergers as exogenous shocks to firm ownership structure, I show that such a value-enhancing effect of ES disagreement is likely causal. I also develop a theoretical model to explain how shareholder disagreement on ES issues influences engagement with firm managers.