The Determinants of the Abnormal Return on Sin Stocks: Based on Economic Conditions and the Differences in Social Factors

Abstract

Purpose – This study is to analyze the determinants of the abnormal return on sin stocks on the basis of the social norm and the neglected-firm effect hypothesis. The social norm and neglected-firm effect are measured by the trading turn-over and the number of reports provided by analyst. Design/methodology/approach – The data of sin stocks are divided into several subgroups such religion, geographic, economic level of living, and social level. After controlling the firm characteristic variables and the economic trends, the cross sectional panel regression was performed on the trading turn-over and the reporting number provided in the analyst’s reports. Findings – Result revealed that sin stocks have positive abnormal return, and such stocks, as compared to control group, are underestimated in the market in spite of superior profitability and debt equity ratio. The abnormal returns of sin stocks are explained by the social norm effect rather than the neglected-firm effect under consideration with respect to the economic condition. Research implications or Originality – Results implicate that investors are reluctant to buy sin stocks because of the negative social perceptions for sin products and therefore sin stocks are underestimated and the expected returns of these stocks are likely to be high. And another implication is that the social norm effect is dominant to explain the abnormal return of sin stocks, and furthermore, it is found that economic level and social corruption level are key determinant to social norm effects.