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

Abstract

The Price of Sin: The Effects of Social Norms on Markets Harrison Hong Princeton University Marcin Kacperczyk University of British Columbia First Draft: June 2005 This Draft: March 2007 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 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 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 time variation in norms for tobacco also suggests that norms affect stock prices and returns. _____________________ We thank Murray Carlson, Douglas Diamond, Lorenzo Garlappi, Rob Heinkel, Narasimhan Jegadeesh, Lisa Kramer, Alan Kraus, Arvind Krishnamurthy, Jeffrey Kubik, Owen Lamont, Kai Li, Jose Scheinkman, Anna Scherbina, Jeremy Stein, Andrei Ukhov, Rossen Valkanov, …

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