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Research Highlights

Morality and the Stock Market

By Marcin Kacperczyk, Assistant Professor of Finance & Boxer Faculty Fellow

kacperczyk sin research article

This research shows that social norms are important for economic outcomes and that they affect markets, including investment decisions, stock prices, and returns.

If investors are doing good by avoiding investment in so-called sin stocks (alcohol, gaming, and tobacco), are they also doing well? Actually, no.

Assistant Professor of Finance Marcin Kacperczyk of NYU Stern studied stock market performance between 1926 and 2006 and found that sin stocks earned an average of 2.5 percent higher returns on a risk-adjusted basis than stocks of companies with comparable characteristics in the beverage, food, and entertainment industries.

The pariah status of sin stocks may well contribute to their value as investments. In the paper, “The Price of Sin: The Effects of Social Norms on Markets,” Kacperczyk and his co-author show that there is a societal norm against funding operations that promote vice, and that some institutional investors, such as pension funds that are subject to norms, hold less of these stocks. Consequently, the stocks get less coverage by sell-side analysts.

Such neglect leads to share prices that are depressed relative to their fundamental values, because of limited risk sharing. These factors, in turn, generate higher expected returns than comparables.

So while less socially constrained mutual funds and independent investors may profit by behaving more like arbitrageurs, buying sin stocks if they are ignored and priced cheap, pension funds and socially responsible funds that abjure sin stocks pay the price.

Says Kacperczyk: “This research shows that social norms are important for economic outcomes and that they affect markets, including investment decisions, stock prices, and returns.”