A study from professors at New York University and PrincetonUniversity concludes investors pay a price for not investing in "sin" stocks--publiclytraded companies involved in alcohol, tobacco, and gaming.
Investors gain 2.5% higher returns every year on arisk-adjusted basis by investing in sin stocks versus investing in stockswith comparable characteristics, such as beverage, food, and entertainmentcompanies, respectively, conclude NYU Stern Assistant Professor of FinanceMarcin Kacperczyk and his co-author, Harrison Hong from Princeton University,in their paper, The Price of Sin: The Effects of Social Norms on Markets.
The paper examined the performance of stocks from 1926-2006.A working paper with the same name by Kacperczyk and Hong that was released in2006 looked at the1980-2003 time period and also found outperformance by sin stocks.
Last year Meir Statman, a professor at Santa Clara University, and Denys Glushkov of the University of Pennsylvania released a study that found offsetting characteristics of stocksliked and disliked by socially responsible investors. "We find that stocksof companies with high ratings on social responsibility characteristicsoutperformed companies with low ratings. However we also find that 'shunned'stocks [i.e., alcohol, tobacco, gambling, firearms, military, and nuclear] outperformedthose in other industries ... The two effects balance out, such that sociallyresponsible indexes have returns that are approximately equal to those ofconventional indexes." Last year the paper won the Moskowitz Prize from theCenter for Responsible Business at The University of California at Berkeley. In 2006, Herbert Blank and Andrea Psoras of QEDInternational Associates released research that also concluded eliminating "sin" stocks from portfolios reduces returns.
Kacperczyk and Hong concluded that their findings show thereis a societal norm against funding operations that promote vice and that someinstitutional investors, such as pension plans that are subject to norms, holdless of these stocks and, as a result, pay the financial cost of abstaining. Inaddition, sin stocks receive less analyst coverage than stocks withcomparable characteristics.
While sin stocks are neglected by norm-constrainedinvestors and face greater litigation risk due to social norms, they havehigher expected returns than otherwise comparable stocks, they say.
"This research shows that social norms are importantfor economic outcomes and that they affect markets, including investmentdecisions, stock prices and returns," said Kacperczyk. The paper was recently acceptedfor publication by Journal of Financial Economics.