Do Tobacco Share Owners Finance the Tobacco Business?

Abstract

Many investors do not want to finance morally objectionable activities with their money, such as smoking. But is investing in the shares of tobacco companies the same as financing the tobacco business? Analyzing two decades of data we find that investors in tobacco shares have not provided any fresh capital to tobacco firms for expanding their operations, so the buying or selling of tobacco shares is just a financial exchange and a transfer of ownership between two investors. We do find evidence for capital flows in the opposite direction, namely tobacco companies repurchasing their own shares in the open market. Our results suggest that divesting from tobacco stocks is ineffective at improving public health or at increasing the cost of capital of tobacco firms, while investors lose the right to vote and initiate proposals at shareholder meetings. We conclude that sustainable investors may wish to differentiate their policies depending on the external financing needs of companies.

Keywords: Cost-of-capital, ESG investing, Portfolio management, Sin stocks, Sustainability, Tobacco

JEL Classification: G11, G15, G23, G32