JSTC - Exclusionary Screens And Stock Returns

• Economic theory suggests the share prices of industries that are excluded via negative screens —   “sin” businesses (typically those involved in the gambling, tobacco, alcohol, guns and defense industries) — will become depressed.
• Such stocks would have a higher cost of capital because they would trade at a lower price-to-earnings (P/E) ratio, providing investors with higher expected returns.
• Some investors may view those higher expected returns as compensation for the emotional cost of exposure to offensive companies.
• Socially conscious investors may be willing to accept less-than-optimal returns while gaining peace of mind knowing they are not promoting activities they believe are detrimental to society and/or one’s health.
• Consistent with the shunned-stock hypothesis, the highest returning industries in the U.S. and the U.K. were tobacco and alcohol.

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