Are investors losing their ethics in times of a crisis? A compare study of “good” stocks versus “bad” stocks over the business cycle

The majority of institutional investors exclude sin stocks, i.e. “bad” stocksfrom their investment portfolio, inline with new social responsibility standards.This neglected stock effect leads to limited risk-sharing and undervaluation of sin stocks.In contrast, the demand for social responsible stocks, i.e. “good” stocks,is increasing, leading to overvaluation. But do investors stick to their social values when times get rough and the economy is in a downturn?A paper by Bundy and Pfarrer (2015) explain how individuals, and even organizations, take less social responsibility in times of a crisis. Furthermore, Geels (2013) explains how firmsfocus on economic problems and delay ethical considerations in an economic downturn. Therefore, this thesis suspects that investors drop their ethics and focus on financial returns. Leadingto increased demand for sin stocks, no undervaluation and thus similarperformance as opposed to social responsible stocksin times of a crisis. Using U.S. data between 1965 and 2018, thisthesis confirms the outperformance of sin stocks as opposed toa portfoliosocial responsible stocks. Furthermore, it finds evidence that the outperformance almost disappears in times of an economic crisis. Although, it is suspected that this is due to the disappearance of the neglect effect, as investors are less focused on ethic in times of a crisis, it is not proven by a significant result. Above all, this research adds to the understanding of the performance of “bad” stocks as opposed to “good” stocks in times of a recession.