Ethics and Asset Prices: Theory and Empirical Evidence(2/3)

Traditional asset pricing theories are derived based on the assumption that investorscare only on the monetary values of the assets. In reality, however, people care non-monetary aspects such as social, environmental, and even spiritual dimensions of theassets under consideration. As a result, investors may avoid “sin” stocks such asthose related to tobacco and casino, and engage in socially responsible investment(SRI) or green investment. Similarly, firms’ managers may avoid technologies orinvestments such as the polluting ones that may hurt their “values,” and insteadengage in activities with corporate social responsibility (CSR).But how do such ethical values or beliefs affect asset prices? In this project, Iderive an ethics-augmented capital asset pricing model (E-CAPM). There are, how-ever, various competing explanations concerning the relation between ethics and stockreturns. I shall provide a comprehensive empirical examination using CSR as an ex-ample. The project has three major objectives:1. Propose an ethics-augmented CAPM.2. Using CSR scores as a proxy for ethical values, empirically examine variouscompeting explanations concerning the relation between ethics and asset re-turns.3. From a global asset pricing perspective, using religious beliefs as a proxy forethical values, examine the extent to which asset pricing is affected by investors’ethical beliefs.