The price of sin: The effects of social norms on markets

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 against funding operations that promote vice and that some investors, particularly instit...

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Bibliographic Details
Published in:Journal of financial economics Vol. 93; no. 1; pp. 15 - 36
Main Authors: Hong, Harrison, Kacperczyk, Marcin
Format: Journal Article
Language:English
Published: Amsterdam Elsevier B.V 01.07.2009
Elsevier
Elsevier Sequoia S.A
Series:Journal of Financial Economics
Subjects:
Alcohol
Business reputation
Comparative analysis
Evidence
Expected stock returns
Expected stock returns Institutional ownership Social norms Sin stocks
Financial institutions
Gambling
Hedge funds
Impact analysis
Institutional ownership
Institutions
Investment decision
Investors
Litigation
Market analysis
Markets
Ownership
Prices
Rates of return
Sin stocks
Social conditions & trends
Social norms
Stock exchange expectations
Stock prices
Stocks
Studies
Tobacco
Tobacco industry
United States > US
Sin stocks
Institutional ownership
G11
Expected stock returns
Social norms
D71
ISSN:0304-405X, 1879-2774
Online Access:Get full text
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Summary: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 against funding 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, we find that sin stocks are less held by norm-constrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs, and they receive less coverage from analysts than do stocks of otherwise comparable characteristics. Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms. Evidence from corporate financing decisions and the performance of sin stocks outside the US also suggest that norms affect stock prices and returns.
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ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2008.09.001