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The Price of Sin: The Effects of Social Norms on Markets

50 Pages Posted: 5 Aug 2005  

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)

Date Written: March 15, 2006

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 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.

Keywords: social norms, financial markets, sin stocks

JEL Classification: G12, G19, J71

Suggested Citation

Kacperczyk, Marcin T. and Hong, Harrison G., The Price of Sin: The Effects of Social Norms on Markets (March 15, 2006). Sauder School of Business Working Paper; AFA 2008 New Orleans Meetings Paper; EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=766465 or http://dx.doi.org/10.2139/ssrn.766465

Marcin T. Kacperczyk (Contact Author)

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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