Thursday, April 19, 2007

Moral Judgment On 'Sin Stocks' Means Higher Returns For Vice-Friendly Investors

That's the headline of a press release from the University of British Columbia's Sauder School of Business announcing the release of a draft paper by the school's Prof. Marcin Kacperczyk and Princeton Economics Prof. Harrison Hong.

Prof. Hong lists his research interests as: "Asset pricing with less-than-fully-rational investors; differences of opinion, short-sales constraints and asset prices; social interaction and financial markets; career concerns, biased forecasts and security analysts; organization, performance and mutual funds; asset pricing with asymmetric information and other market imperfections."
Hey! Mine too!

A quote from page 4 (of 50):
"In contrast to institutional investors, individual investors can keep their stock positions out of the view of enforcers of societal norms, and therefore we expect individual investors to be more willing than institutional investors to hold sin stocks."

The fact that an individual investor (or hedgie) won't be elbowed away from the trough by CALPERS means your entry price into a name won't carry a societal approval premium. On the other hand your exit price will be lower to the extent your universe of buyers is limited to vice-savvy investors (hedgies).

And what does this have to do with global warming investments?
One-as social pressure builds to be perceived as green, see Yahoo yesterday ("Our numbers suck but we're carbon neutral!) we should see an expanding green premium.

Two-as the dirtiest, filthiest, vilest, Hitlerian energy sources are shunned (at least in polite company) their risk premia will shrink. At least until I join my brother Greenshirts in a Night of the Longknives at BTU headquarters, 701 Market St., St. Louis, MO 63101.

Ahem. Excuse me. Got carried away.
See you at the face-painting booth Sunday, Earth Day.

Here's the Kacperczyk/Hong paper, "The Price of Sin: The Effects of Social Norms on Markets".