Is It Wise to Invest in Vice? Pricing Effects of Socially Responsible Investment Strategies

Carl-Johan Ulf Vilhelmsson & Jonas Erik Wahl Sjöman

Student thesis: Master thesis


This thesis studies the effects that social norms have on financial markets. Specifically, the paper explores the effects of social norms on institutional ownership, analyst coverage, returns, valuations and corporate financing decisions of sin stocks. Sin stocks are defined as stocks operating in the alcohol, tobacco, and gaming industries. We analyze this effect by downloading return, stock, and accounting data for the period 1980-2017 for US firms. First, we test if these stocks are shunned by institutional investors and if they are covered by fewer analysts. Running a pooled regression with a number of known controls, we find that sin stocks are shunned by institutions and followed by fewer analysts. This effect is especially apparent when looking at a subsample of institutional investors who are believed to have to adhere to social norms. Second, to analyze the price effects of these exclusionary investment strategies, we test the return of an equal-weighted portfolio long in sin stocks minus the return of one short in comparable stocks. The returns are tested against the CAPM, the Fama-French and the Carhart Momentum factors to determine if the portfolio offers abnormal returns. We find a positive and significant alpha, indicating that sin stocks outperform their comparables. We also test the excess return of sin stocks versus other stocks and find that sin stocks offer higher excess return. Third, by comparing different valuation ratios while controlling for known factors, we find further evidence that sin stocks are undervalued. Lastly, we compare the financing decisions of sin stocks versus other stocks and find some evidence that sin stocks use more debt financing than other stocks. We believe the reason for our findings is pressure from social norms. We also see increased statistical significance and magnitude in recent years indicating that social norms have toughened.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2019
Number of pages96
SupervisorsLinda Sandris Larsen