Analyzing the Effects of Social Norms on Sin Stock Excess Returns: From the Viewpoint of Religion and Geographical Location

Abstract

This study analyzes the effect of social norms on sin stocks’ excess return. The geographical and religious factors are simultaneously considered as elements representing social norms. Utilizing 259 firms from 55 different countries, the excess returns are estimated using Jensen’s  as well as Carhart’s 4 factors model. The cross-sectional panel regression is run on the excess returns after controlling the internal and external variables. From the study findings, there exist the statistically significant positive excess returns on sin stocks relative to the geographical factor in the case of Europe, Latin America, and Africa, but not in Asia and North America. These results can be explained by different social perceptions on smoking, alcohol drinking, and gambling. An analysis of the excess return difference relative to religion shows significant positive coefficients in Buddhism and Catholicism, but not in the Protestant and Islam religions since Protestants are prohibited from drinking alcohol and smoking. This therefore influences Protestants’ and Muslims’ investment in sin stocks with excess returns for Protestants showing negative returns even if statistically insignificant. The opposite is true in case of Catholicism and Buddhism where alcohol drinking and smoking are not prohibited for. This study finds significant positive excess return on sin stocks. This result is confirmed in Latin America, where all primarily adopt Catholicism.