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

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.