Avoiding sin stock: does it make a difference?

Question

Until now I've avoided sin stock, such as tobacco, for the typical "moral reasons" (define those as you will), in particular in order to avoid raising their value as a company by creating demand (even if it is a drop in the ocean).

However, this article, in its second point argues:

By refusing to buy a tobacco stock, you are theoretically lowering the price of the stock by decreasing the demand. If millions of Americans share your attitude, you can lower the price of the stock [...]

What happens then? Even if there were no hedge-fund that would buy the cheap stock, the article argues that the company itself can engage in better-value-for-money stock buyback.

So does it really matter to avoid (existing, already issued) sin stocks?

Edit: It is different from "Ethics and investment" question as that one is discussed broad investment strategies with ethics, however mine is "how exactly do I support unethical business by trading their shares and does it have any real impact?"

Answer 1

Yes, it does matter. You are right that lower demand for a stock will drive its price down. Lower stock prices can hurt the company. Take a look at Fixee's answer to this question:

a declining share price will make it hard to secure credit, attract further investors, build partnerships, etc. Also, employees are often holding options or in a stock purchase plan, so a declining share price can severely dampen morale.

In an extreme case, if share prices plummet too far, the company can be pressured to reverse-split the shares, and (eventually) take the company private. This recently happened to Playboy.

If you do not want to support a company, for whatever reason, then it is wise to avoid their stock.

Answer 2

This question drives at what value a shareholder actually provides to a corporation, and by extent, to the economy.

If you subscribe for new shares (like in an Initial Public Offering), it is very straightforward to say "I have provided capital to the corporation, which it is using to advance its business." If you buy shares that already exist (like in a typical share purchase on a public exchange), your money doesn't go to the company. Instead, it goes to someone who paid someone who paid someone who paid someone (etc.) who originally contributed money to the corporation.

In theory, the value of a share price does not directly impact the operation of the company itself, apart from what @DanielCarson aptly noted (employee stock options are affected by share price, impacting morale, etc.). This is because in theory, the true value of a company (and thus, the value of a share) is the present value of all future cashflows (dividends + final liquidation). This means that in a technical sense, a company's share price should result from the company's value. The company's true value does not result from the share price.

But what you are doing as a shareholder is impacting the liquidity available to other potential investors (also as mentioned by @DanielCarson, in reference to the desirability for future financing). The more people who invest their money in the stock market, the more liquid those stocks become. This is the true value you add to the economy by investing in stocks - you add liquidity to the market, decreasing the risk of capital investment generally.

The fewer people there are who are willing to invest in a particular company, the harder it is for an investor to buy or sell shares at will. If it is difficult to sell shares in a company, the risk of holding shares in that company is higher, because you can't "cash out" as easily. This increased risk then does change the value of the shares - because even though the corporation's internal value is the same, the projected cashflows of the shares themselves now has a question mark around the ability to sell when desired.

Whether this actually has an impact on anything depends on how many people join you in your declaration of ethical investing. Like many other forms of social activism, success relies on joint effort. This goes beyond the direct and indirect impacts mentioned above; if 'ethical investing' becomes more pronounced, it may begin to stigmatize the target companies (fewer people wanting to work for 'blacklist' corporations, fewer people buying their products, etc.).

Answer 3

Your question is, "how exactly do I support unethical business by trading their shares and does it have any real impact?"

By trading their shares, you're owning their shares. By owning their shares, you're complicit in their activities.

It's true that their are sin-stock activists who genuinely hope to force these businesses to change, but, many investors don't expect their refusal to participate in an exploitative, objectionable business to change anything but their own individual moral condition.

With that in mind, absolutely, yes, it makes a difference.

Answer 4

I think that the premise of the article is a bit short sighted:

2. Most tobacco companies are currently engaging in stock buybacks, in particular Lorillard and Philip Morris International. By refusing to buy a tobacco stock, you are theoretically lowering the price of the stock by decreasing the demand.

Lower demand also means lower supply. That affects liquidity if the volume traded daily is low but Philip Morris is a behemoth with a huge daily volume so activists are going to have a minimal effect on its share price. It's wishful thinking.

With stocks that truly have lower liquidity, spreads widen. However, a consequence of lower liquidity is that it's much easier to move share price and buybacks will certainly achieve that.

Not a good analysis in the linked article.