The Price of Sin: The Effects of Social Norms on Markets
Marcin T. Kacperczyk
Imperial College London - Accounting, Finance, and Macroeconomics; National Bureau of Economic Research (NBER)
Harrison G. Hong
Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)
March 15, 2006
Sauder School of Business Working Paper
AFA 2008 New Orleans Meetings Paper
EFA 2006 Zurich Meetings
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 to not fund 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, sin stocks are less held by certain institutions, such as pension plans (but not by mutual funds who are natural arbitrageurs), and less followed by analysts than other stocks. Consistent with them facing greater litigation risk and/or being neglected because of social norms, they outperform the market even after accounting for well-known return predictors. Corporate financing decisions and time-variation in norms for tobacco also indicate that norms affect stock prices. Finally, we gauge the relative importance of litigation risk versus neglect for returns. Sin stock returns are not systematically related to various proxies for litigation risk, but are weakly correlated to the demand for socially responsible investing, consistent with them being neglected.
Number of Pages in PDF File: 50
Keywords: social norms, financial markets, sin stocks
JEL Classification: G12, G19, J71
Date posted: August 5, 2005
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