The Price of Sin Revisited: Evidence from Hemp Stock Market

While effects of social norms on investors’ behavior in financial markets was recognized some time ago, interconnection of legislation environment and prevailed social norms are rarely mentioned in financial context. I revisit issue of influence of social norms on stock markets by adding evidence of change in legal framework. Specifically, I focus on the effect of full legalization of marijuana for recreational usage in Canada and some US states: whether or not this event changes existing social norm. As social norm cannot be measured directly, I use share of institutional holdings in hemp stocks as a proxy. It was shown previously that investing decisions on financial markets are heavily affected by reputational risks. I use change in institutional holdings in hemp stocks as evidence of change in social attitude, and, as a result, change in social norm. Importance of marijuana legalization as an event for stock market is shown through event study framework. Analysis of related industries suggests that alcohol stocks act as complements for cannabis stocks in a response for legalization, while tobacco stocks remain unaffected. Further by applying both dummy variable approach and Chow test, I find evidence of structural change in institutional holdings in marijuana stocks.