Pricing Sin Stocks: Ethical Preference vs. Risk Aversion

Authors: Giuliano Curatola (Goethe University and SAFE), Stefano Colonnello (Halle Institute for Economic Research (IWH) and Otto-von-Guericke University Magdeburg) and Alessandro Gioffrè (University of Florence)

Title: Pricing Sin Stocks: Ethical Preference vs. Risk Aversion

Abstract: We develop a 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. We show that when dividends and ethicalness are complementary goods and investors are suffciently risk averse, the model predicts that the dividend share of sin companies exhibits a positive relation with the future return and volatility spreads. Our empirical analysis supports the model's predictions.