Shades of Grey: Capital Structure Decisions of Non-Sin vs. Sin Firms in the G20 Nations

54 Pages Posted: 17 Mar 2012

See all articles by Michael McDonald

Michael McDonald

Fairfield University - Charles F. Dolan School of Business

Larry Fauver

University of Tennessee, Knoxville - Department of Finance; University of Tennessee

Date Written: March 15, 2012

Abstract

This paper examines the impact of social norms on firm value and the capital structure of firms engaged in the production of tobacco, alcohol, and gambling services ('sin stocks') in the G20 nations. We first demonstrate that sin stocks are undervalued in countries where social norms are strongly against such firms. The negative impact on these firms’ equity valuation (roughly 8% on average) leads them to rely more heavily on debt financing. Specifically, we show that sin stocks compared to similar non-sin stocks have higher levels of debt (roughly 4 times), a greater probability of taking on debt, and a lower debt cost of capital (after controlling for debt load). Finally, we show that specific market behavior towards sin stocks is influenced by other country specific social norms like the degree of individualism and risk aversion. Our results are robust to alternative measures of firm valuation and debt load.

Keywords: social norms, sin stocks, behavioral anomalies, debt cost of capital, international markets

Suggested Citation

McDonald, Michael and Fauver, Larry, Shades of Grey: Capital Structure Decisions of Non-Sin vs. Sin Firms in the G20 Nations (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2017725 or http://dx.doi.org/10.2139/ssrn.2017725

Michael McDonald (Contact Author)

Fairfield University - Charles F. Dolan School of Business ( email )

N. Benson Road
Fairfield, CT 06824
United States

Larry Fauver

University of Tennessee, Knoxville - Department of Finance ( email )

424 Stokely Management Center
Knoxville, TN 37996
United States

University of Tennessee ( email )

424 Stokely Management Center
Department of Finance
Knoxville, TN 37996-0540
United States
865-974-1722 (Phone)
865-974-1716 (Fax)

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