How social norms affect the corporate bond market: from a sinful perspective

Ioffer a comprehensive study on the existence and drivers of a Sin firm premium on the US corporate bond market. Using a sample of 7,499 non-financialbondswithout any special featuresissued between 2000 and 2019, I providestatistically insignificantevidence that Sin firms paya23.3 bp higher credit spreadcompared to otherwise similar firms in non-Sin industries. Thisinflates the cost of corporate bonds for Sin firms by 7.9% relative to the 3.0% sample mean. The economic significance of the Sin firm premium is robust for different model specifications and Sin firm classifications. Like the literature I aim to supplement, I intendto attribute the Sin firm premium to neglect by norm-constrained institutional investors. Using time, Google trends and Republican electoral dominanceas novel proxies for social norm intensity, I can only provide weak evidence for a relationship between social normsand the Sin firm premium. Also, I investigate whether the Sin firm premium is driven by idiosyncratic risk, liquidity, or sensitivityto market-wide illiquidity. I only find an indication for the latter, on which Ibuild a suggestion for aliquidity neglect effect.