Following the Stream: The Effects of Social Norms on Oil, Gas, and Coal Stocks

Abstract: In this paper, we provide new evidence on social norms' implications for financial markets by studying U.S. oil, gas, and coal stocks in the period of 2000-2018. Following the methodology of Hong and Kacperczyk (2009), we show that these stocks, similar to the conventional "sin stocks" of alcohol, gaming, and tobacco firms, are less held by institutional investors subject to norm pressure. Furthermore, we find that the attribute of being an oil, gas, or coal stock is associated with superior stock return and lower market valuation, consistent with investors being subject to limited risk sharing. Although the relationship does not appear as consequential in shorter timespans, our findings support the viewpoint that financial markets may not only be susceptible to norms associated with social practice, but also environmental practice.