Faculty of Economics and Business Administration Publications Database

Pricing sin stocks: Ethical preference vs. risk aversion

Selected
Authors:
Gioffré, Alessandro
Colonnello, Stefano
Source:
Volume: 118
Pages: 69 - 100
Month: September
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2019
Abstract:

We develop an ethical preference-based model that reproduces the average return and volatility spread between sin and non-sin stocks. Our investors do not necessarily boycott sin companies. Rather, they are open to invest in any company while trading off dividends against ethicalness. When dividends and ethicalness are complementary goods and investors are sufficiently risk averse, the model predicts that the dividend share of sin companies exhibits a positive relation with the future return and volatility spreads. An empirical analysis supports the model’s predictions. Taken together, our results point to the importance of ethical preferences for investors’ portfolio choices and asset prices.

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