The price of sin: The effects of social norms on markets

Abstract

We provide evidence for the effects of social norms on markets by studying "sin" stocks-publicly traded companies involved in producing alcohol, tobacco, and gaming. We hypothesize that there is a societal norm against funding operations that promote vice and that some investors, particularly institutions subject to norms, pay a financial cost in abstaining from these stocks. Consistent with this hypothesis, we find that sin stocks are less held by normconstrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs, and they receive less coverage from analysts than stocks of otherwise comparable characteristics. Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms. Evidence from corporate financing decisions and time variation in norms for tobacco also suggests that norms affect stock prices and returns.

Corporate Sustainability: First Evidence on Materiality

“…Past literature documents that 'sin' stocks outperform in the future because they have been neglected by the market (Hong and Kacperczyk 2009). Because the involvement in 'sin' business could be directly related to sustainability scores, we assess the robustness of our results excluding firms that participate in such lines of business.…”

Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations

“…There are now a number of studies on SRI which have investigated the following aspects, primarily through the lens of mutual funds, but also through regional SRI indexes for not only the US, but also Europe and other major developed economies. (a) Performance (i.e., risk-return characteristics relative to conventional indexes), using mutual funds and broad market indexes [11,12, and at firm-level [3,34,[39][40][41][42][43][44][45]. These studies, however, fail to provide clear-cut empirical evidence on whether SRI does yield higher returns after adjusting for risks.…”

Are they any good at all? A financial and ethical analysis of socially responsible mutual funds

“…While there are some studies that report upon a superior nancial performance of certain SRI criteria (Moskowitz, 1972;Luck and Pilotte, 1993;Derwall et al, 2005;Edmans, 2011), others nd empirical evidence of a nancial underperformance (Brammer et al, 2006;Renneboog et al, 2008a;Hong and Kacperczyk, 2009;Mǎnescu, 2011). There is also a bulk of studies which sees no signi cant differences between the nancial performance of SRI and conventional investments (Hamilton et al, 1993;Kurtz and DiBartolomeo, 1996;Guerard, 1997;Bauer et al, 2005;Schröder, 2007;Statman and Glushkov, 2008).…”