50 Pages Posted: 5 Aug 2005
Date Written: March 15, 2006
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: 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