Pricing Sin Stocks: Ethical Preference vs. Risk Aversion
63 Pages Posted: 12 Jul 2018
Date Written: July 14, 2018
We develop a model that reproduces the average return and volatility spread between sin and non-sin stocks. Our investors do not necessarily boycott sin companies. Rather, they are open to invest in any company while trading off dividends against ethicalness. We show that when dividends and ethicalness are complementary goods and investors are sufficiently risk averse, the model predicts that the dividend share of sin companies exhibits a positive relation with the future return and volatility spreads. Our empirical analysis supports the model's predictions.
Keywords: Asset Pricing, General Equilibrium, Sin Stocks
JEL Classification: D51, D91, E20, G12
Suggested Citation: Suggested Citation