Hostname: page-component-6bf8c574d5-7jkgd Total loading time: 0 Render date: 2025-03-02T15:02:39.688Z Has data issue: false hasContentIssue false
  • English
  • Français

Social Screens and Systematic Investor Boycott Risk

Published online by Cambridge University Press:  09 February 2017

H. Arthur Luo  and
Ronald J. Balvers
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We model the pricing implications of screens adopted by socially responsible investors. The model reproduces the empirically observed abnormal return to sin stock and implies a premium for systematic investor boycott risk that affects targeted as well as nontargeted firms. The investor boycott premium is not displaced by litigation risk, measures of neglect effect, illiquidity, industry momentum, or concentration. The investor boycott risk factor is useful in explaining mean returns across industries, and its premium varies with the relative wealth of socially responsible investors and the business cycle.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 1 , February 2017 , pp. 365 - 399
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1 The authors are grateful for valuable comments provided by Hendrik Bessembinder (the editor), Andrew Carrothers, Michael Cooper (the referee), Clarence Kwan, Hugues Langlois, John Maheu, Jiaping Qiu, Jimmy Ran, Olivier Scaillet, Adam Stivers, Kevin Veenstra, and workshop participants at the Geneva Summit on Sustainable Finance, the 2014 Eurofidai International Paris Finance Meeting, McMaster University, and Lingnan University. Balvers thanks the Michael Lee-Chin & Family Institute for Strategic Business Studies for research support. The views expressed in this paper are those of the authors alone and do not necessarily reflect those of the Office of the Comptroller of the Currency or the U.S. Department of the Treasury.

References

Adler, T., and Kritzman, M.. “The Cost of Socially Responsible Investing.” Journal of Portfolio Management, 35 (2008), 52–56.CrossRefGoogle Scholar
Amihud, Y.“Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Arbel, A.; Carvell, S.; and Strebel, P.. “Giraffes, Institutions and Neglected Firms.” Financial Analysts Journal, 39 (1983), 57–63.CrossRefGoogle Scholar
Barber, B. M., and Odean, T.. “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies, 21 (2008), 785–818.Google Scholar
Black, F.; Jensen, M; and Scholes, M.. “The Capital Asset Pricing Model: Some Empirical Tests.” In Studies in the Theory of Capital Markets, Jensen, M. C., ed. New York: Praeger (1972), 79–121.Google Scholar
Carhart, M. M.“On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chan, K. C., and Chen, N. F.. “An Unconditional Asset-Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk.” Journal of Finance, 43 (1988), 309–325.Google Scholar
Chen, N. F.“Financial Investment Opportunities and the Macroeconomy.” Journal of Finance, 46 (1991), 529–554.Google Scholar
Chou, P. H.; Ho, P. H.; and Ko, K. C.. “Do Industries Matter in Explaining Stock Returns and Asset-Pricing Anomalies?” Journal of Banking and Finance, 36 (2012), 355–370.CrossRefGoogle Scholar
Conrad, J.; Cooper, M.; and Kaul, G.. “Value versus Glamour.” Journal of Finance, 58 (2003), 1969–1996.Google Scholar
Durand, R. B.; Koh, S.; and Tan, P. L.. “The Price of Sin in the Pacific-Basin.” Pacific-Basin Finance Journal, 21 (2013), 899–913.Google Scholar
Errunza, V., and Losq, E.. “International Asset Pricing under Mild Segmentation: Theory and Test.” Journal of Finance, 40 (1985), 105–124.CrossRefGoogle Scholar
Fabozzi, F. J.; Ma, K. C.; and Oliphant, B. J.. “Sin Stock Returns.” Journal of Portfolio Management, 35 (2008), 82–94.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Disagreement, Tastes, and Asset Prices.” Journal of Financial Economics, 83 (2007), 667–689.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Fang, L., and Peress, J.. “Media Coverage and the Cross-Section of Stock Returns.” Journal of Finance, 64 (2009), 2023–2052.CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “The Relation between Mean-Variance Efficiency and Arbitrage Pricing.” Journal of Business, 60 (1987), 97–112.CrossRefGoogle Scholar
Harvey, C.; Liu, Y.; and Zhu, H.. “…and the Cross-Section of Expected Returns.” Review of Financial Studies, 29 (2016), 5–68.Google Scholar
Hong, H., and Kacperczyk, M.. “The Price of Sin: The Effects of Social Norms on Markets.” Journal of Financial Economics, 93 (2009), 15–36.CrossRefGoogle Scholar
Hong, H.; Lim, T.; and Stein, J. C.. “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies.” Journal of Finance, 55 (2000), 265–295.Google Scholar
Hou, K. W., and Robinson, D. T.. “Industry Concentration and Average Stock Returns.” Journal of Finance, 61 (2006), 1927–1956.CrossRefGoogle Scholar
Jagannathan, R., and Wang, Z. Y.. “The Conditional CAPM and the Cross-Section of Expected Returns.” Journal of Finance, 51 (1996), 3–53.Google Scholar
Jagannathan, R., and Wang, Z. Y.. “An Asymptotic Theory for Estimating Beta-Pricing Models Using Cross-Sectional Regression.” Journal of Finance, 53 (1998), 1285–1309.Google Scholar
Kim, I., and Venkatachalam, M.. “Are Sin Stocks Paying the Price for Accounting Sins?” Journal of Accounting, Auditing & Finance, 26 (2011), 415–442.CrossRefGoogle Scholar
Lewellen, J.; Nagel, S.; and Shanken, J.. “A Skeptical Appraisal of Asset Pricing Tests.” Journal of Financial Economics, 96 (2010), 175–194.CrossRefGoogle Scholar
Liew, J., and Vassalou, M.. “Can Book-to-Market, Size and Momentum Be Risk Factors that Predict Economic Growth?” Journal of Financial Economics, 57 (2000), 221–245.CrossRefGoogle Scholar
Liu, Y.; Lu, H.; and Veenstra, K.. “Is Sin Always a Sin? The Interaction Effect of Social Norms and Financial Incentives on Market Participants’ Behavior.” Accounting, Organizations and Society, 39 (2014), 289–307.Google Scholar
Lo, A. W., and MacKinlay, A. C.. “Data-Snooping Biases in Tests of Financial Asset Pricing Models.” Review of Financial Studies, 3 (2015), 431–467.CrossRefGoogle Scholar
Lobe, S., and Walkshäusl, C.. “Vice versus Virtue Investing around the World.” Review of Managerial Science, 10 (2016), 303–344.Google Scholar
Merton, R. C.“An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867–887.CrossRefGoogle Scholar
Merton, R. C.“A Simple-Model of Capital-Market Equilibrium with Incomplete Information.” Journal of Finance, 42 (1987), 483–510.Google Scholar
Moskowitz, T. J., and Grinblatt, M.. “Do Industries Explain Momentum?” Journal of Finance, 54 (1999), 1249–1290.Google Scholar
Pástor, L., and Stambaugh, R. F.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642–685.CrossRefGoogle Scholar
Petkova, R., and Zhang, L.. “Is Value Riskier Than Growth?” Journal of Financial Economics, 78 (2005), 187–202.CrossRefGoogle Scholar
Renneboog, L.; Ter Horst, J.; and Zhang, C. D.. “Socially Responsible Investments: Institutional Aspects, Performance, and Investor Behavior.” Journal of Banking & Finance, 32 (2008), 1723–1742.Google Scholar
Renneboog, L.; Ter Horst, J.; and Zhang, C. D.. “Is Ethical Money Financially Smart? Nonfinancial Attributes and Money Flows of Socially Responsible Investment Funds.” Journal of Financial Intermediation, 20 (2011), 562–588.CrossRefGoogle Scholar
Roll, R.“A Critique of the Asset Pricing Theory’s Tests.” Journal of Financial Economics, 4 (1977), 129–176.Google Scholar
Salaber, J.“The Determinants of Sin Stock Returns: Evidence on the European Market.” Working Paper, Paris-Dauphine University (2007).Google Scholar
Salaber, J.“Sin Stock Returns over the Business Cycle.” Working Paper, University of Bath (2009).Google Scholar
Söderström, T. Discrete-Time Stochastic Systems: Estimation and Control. London: Springer (2002).CrossRefGoogle Scholar
Statman, M., and Glushkov, D.. “The Wages of Social Responsibility.” Financial Analysts Journal, 65 (2009), 33–46.Google Scholar
Teoh, S.; Welch, I.; and Wazzan, C.. “The Effect of Socially Activist Investment Policies on the Financial Markets: Evidence from the South African Boycott.” Journal of Business, 72 (1999), 35–89.CrossRefGoogle Scholar
Supplementary material: File

Luo and Balvers supplementary material

Internet Appendix

Download Luo and Balvers supplementary material(File)
File 249 KB