Sin Stocks Research Articles

Wealth and familiarity bias: sin stocks investment in Europe

AbstractOur study investigates the relationship between European society’s wealth and how they invest in sin stocks—stocks of listed firms involved in producing tobacco, alcohol, and gambling goods and services returns. Using time series data from 24 European countries from 2000 to 2020 to check the performance of sin stocks, we tested 3 hypotheses to explore the possibility that sin stock returns are related to the wealth of the countries they are based on and to the levels of consumption of alcohol and gambling in those countries. Three quantitative methods are used to measure risk-adjusted returns of the sin stocks: the CAPM single-factor or market model, the Fama-French 3-factor model, and the Fama-French 5-factor model. We found significant evidence of the existence of abnormal returns. The evidence supports that sin stocks have a significant relation with the market, lower volatility, and have better risk-adjusted returns during times of economic downturn. Our results show that sin stocks from the wealthier Northern European countries yield higher risk-adjusted returns than their Southern and Easter European counterparts. We found familiarity bias in gambling sin stocks, which suggests that getting used to something seen as sinful can lead to a lower feeling of rejection. As it is common in behavioural finance, behind the data and numbers of the financial markets, ordinary human behaviour is an essential explanation that defies the orthodox concepts of mathematical efficiency.

The effect of ESG-motivated turnover on firm financial risk

This study investigates how effectively a forced CEO turnover mitigates a firm's distress risk amplified by a bad reputation for its Environmental, Social, and Governance (ESG) practices. We find that a firm's CEO dismissal decision significantly reduces the level of its distress risk—measured by Altman's Z-Score—subsequent to negative media coverage of the firm's ESG practices. This suggests that the forced CEO turnover may be taken as an ex-post damage instrument. Additional results show that the mitigation effect of CEO dismissal is stronger in firms under greater market scrutiny conditioned on various mechanisms: market competition, sin stock industry, and analyst coverage.

Do US Active Mutual Funds Make Good of Their ESG Promises? Evidence from Portfolio Holdings

We investigate the occurrence of greenwashing in the US mutual fund industry. Using panel regression methods, we test whether there exist differences in the portfolio investment behaviors of active equity funds that are self-declared to be driven by ESG motives when compared to all other funds. In particular, we focus on two aspects of funds’ portfolio allocation decisions, i.e., the actual implied average ESG ratings of the stocks a mutual fund invests in and the portfolio share invested in sin stocks. We do not find strong evidence that ESG and non-ESG funds make identical investment choices and hence reject the hypothesis of widespread greenwashing. ESG funds, on average, invest more in companies with higher ESG ratings and avoid sin stocks more than non-ESG funds. Nonetheless, we obtain evidence that some degree of greenwashing may still be occurring. However, over time, the differences between ESG and non-ESG funds in these behaviors seem have declined, suggesting a potential reduction in greenwashing practices.

Is a Socially Responsible Investment Necessarily Efficient? Evidence from SRI Mutual Funds and Sin Stocks

Is a Socially Responsible Investment Necessarily Efficient? Evidence from SRI Mutual Funds and Sin Stocks

Sin Stocks and SEC Filing Reviews

In this study, we examine whether and how SEC regulators adjust their oversight processes when there are conflicting risks, specifically among sin stock firms operating in potentially controversial industries, such as alcohol, gaming, and tobacco. On the one hand, we would expect increased scrutiny from SEC staff if they believe that companies willing to offer these sin-related products and services are more likely to skirt SEC disclosure guidelines. On the other hand, if the SEC staff leverage the additional scrutiny these firms are already subjected to from investors, industry regulators, and auditors, we would expect decreased scrutiny from SEC staff. Consistent with the latter, we observe that the SEC is less likely to issue comments on the annual report of sin stock firms. Among those receiving a comment letter, there are no statistically significant differences in rigor or tone, on average. In additional analyses, we find limited evidence that specific reviewer characteristics are associated with differential treatment for sin stock firms in terms of rigor. Finally, we find that among firms that did not receive a comment letter, sin stock firms are less likely to restate their financial statements in the future. Collectively, we interpret this evidence as the SEC efficiently reducing scrutiny on sin stock firms, relative to non-sin stock firms, during the earlier phases of the review process, with minimal differences in the later phases of the review process.

Sin stocks in European countries: The influence of wealth and familiarity bias on investment choices

This study examines the relationship between the wealth of European societies and their investment decisions in «sinful» industries, including tobacco, alcohol, and gambling. The study aims to challenge the widely held belief that wealthier countries are more socially responsible in their investment choices and to investigate the impact of familiarity bias on investment decisions in these industries. An experimental research design with panel data compares the returns from a portfolio of sin stocks from Northern Europe with a portfolio of sin stocks from Southern and Eastern Europe. The study utilises multiple models, including the CAPM single-factor, the Fama-French three-factor, and the Fama-French five-factor, to measure the risk-adjusted returns of sin stocks across various European countries. Findings reveal that sin stocks from wealthier countries tend to have higher risk-adjusted returns compared to those from less wealthy countries. Sin stocks have a significant relation with the market, but their volatility is consistently lower. Countries that drink more alcohol are more willing to invest in alcohol stocks than countries that drink less, as these stocks outperform the market during economic downturns. Sin stocks impact financial performance, investor behaviour, social responsibility, market efficiency, and regulations. The study uncovers the influence of familiarity bias, indicating that investors from countries more accustomed to «sinful» activities are less reluctant to invest in such industries than countries with lower familiarity. This finding highlights the importance of cultural and social factors in shaping investment decisions and challenges traditional concepts of market efficiency.

Do Unethical Stocks Win in Developing Country? Evidence From Indonesia

Ethical investing in various countries is increasingly popular following the number of ethical investors. However, the performance of ethical investments in many developed countries is lower than the performance of the opposite category, unethical stock, or researchers called it as sin stock. This study examines whether the performance of sin stocks in Indonesia is as good as the performance of sin stocks in developed countries considering the very different cultures and religions. This study comprehensively measures the performance of all sin stocks and ethical stocks using the risk-adjusted return approach, the Sharpe and Treynor ratios. To sharpen the analysis, this study also measures the efficiency of all types of stocks using the data envelopment analysis method. The results show that the performance of the sin stock portfolio in Indonesia is different from the facts in developed countries. Sin stocks in Indonesia had the worst performance during 2013-2022 compared to ethical stocks. Furthermore, in terms of efficiency, the SRI-Kehati Index has the highest score compared to all indices. This research contributes to provide theoretical and practical insights about the comparison of the performance of sin stocks and their counterparts in Indonesia which is different from sin stocks in developed countries. The originality of the research includes the creation of a sin stock portfolio and the use of constraint stocks as a proxy for ethical stocks.

Measuring Business Social Irresponsibility: The Case of Sin Stocks

Measuring Business Social Irresponsibility: The Case of Sin Stocks

A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Environmental Integration and Sin Stock Exclusion

Abstract This article shows how sustainable investing—through the joint practice of exclusionary screening and environmental, social, and governance (ESG) integration—affects asset returns. I develop an asset pricing model with partial segmentation and heterogeneous preferences. I characterize two exclusion premia generalizing Merton’s (1987) premium on neglected stocks and a taste premium that clarifies the relationship between ESG and financial performance. Focusing on US stocks, I estimate the model by applying it to sin stocks as excluded assets and using the holdings of green funds to proxy for environmental integration. The average annual exclusion effect is 2.79% for the period 1999–2019. Although the annual taste effect ranges from –1.12% to + 0.14% across industries for 2007–19, the taste effect spread between the top and bottom terciles of companies within each industry can exceed 2% per year. Finally, I estimate and explain the dynamics of these premia.

Developing Conceptual Framework of Ethical Investment Studies

The study aims to conduct a conceptual review of ethical investment research based on Widyawati (2019). Through the conceptual review method, the research obtained 70 relevant articles. The results of the literature analysis conclude that there is a development of ethical investment studies and in general it is divided into four main themes, namely (i) investor behavior studies, (ii) ethical investment development studies, (iii) ethical investment performance studies and (iv) ethics and religious-based investment studies (stock of sin stocks category). The studies of investor behavior focuses on examining the characteristics of ethical investors such as motivation, investment patterns and the basis for making investment decisions. The studies of ethical investment development emphasizes the description of ethical investment in a particular area, the argumentation of ethical investment theory and the role of participants in the ethical investment market, including ethical investment mechanisms, namely screening and shareholder activism. The studies of ethical investment performance focus on the performance by comparing the return on ethical investment with its benchmark (nonethical investment). Meanwhile the studies of ethical and religious-based investment (stock of sin stocks category) focuses on testing implementation of negative screening of sin stocks, testing the performance of sin stocks and testing the relationship between sin stocks with certain themes.

The Pricing of ESG: Evidence From Overnight Return and Intraday Return

By featuring the link of investor heterogeneity to the persistence of the overnight and intraday components of returns, we examine the ESG–overnight (intraday) alpha relation in the Chinese stock market. The empirical results show that ESG score has a significantly negative effect on the expected stock overnight returns in Fama–MacBeth regression. Consistently, given the biggest market capitalization and the least illiquidity subsamples, the trading strategies by going long (short) the top (bottom) ESG quintile would yield negative profits. In addition, we conduct the implication of the ESG pricing by dividing the full sample into green stock subsample and sin stock subsample, and the empirical results present that the ESG pricing is pervasive of the green-type stocks. These conclusions verify the pricing of ESG and support the conjecture that green stocks have lower expected returns because ESG investors value sustainability.

Do ethics outpace sins?

The fundamental precept of alcohol and gambling stocks relates to higher return premiums, whereas ethical investments are pitched towards meeting environmental, social, and moral concerns of investors. Fostering this argument, the current study examines quantile coherencies among sin stocks, ethical investments and conventional markets. We report noteworthy quantile coherencies among markets at different frequencies reflecting higher diversification, safe-haven, and hedging potential of sustainable markets outpacing sin stocks and conventional markets. We proposed useful implications for practitioners, ethical investors, and policymakers.

S(k)in in the game: Investing Responsibly in the Face of Risk

This letter deals with responsible decision making: Will model presence and risk influence investment in socially responsible funds? We conducted a choice-based experiment in which participants were invited to allocate their portfolio across three investments: a socially responsible fund, a sin fund or a safe account. The risk of the SRI and sin fund was manipulated across treatment (high or low), as well as the presence of a model face (woman, man or without). We find that SRI choice was positively influenced by the presence of a masculine face. A higher level of risk of the sin fund relative to the SRI one favors greater investment in SRI. On the opposite, a higher level of risk of the SRI relative to the sin fund reduces investment in SRI, apart for highly ethically-minded consumers, who invest in SRI and shun sin stock without consideration for risk.

Deontological and Utilitarian Responses to Sacrificial Dilemmas Predict Disapproval of Sin Stocks

Abstract. Investors sometimes invest in the so-called “sin” stocks that cause social harm as a by-product of doing business (e.g., tobacco companies). Three studies examined whether people who reject harm and maximize outcomes in sacrificial dilemmas approve less of investing in sin (but not conventional) stocks. We employed process dissociation to assess harm-rejection (deontological) and outcome-maximization (utilitarian) response tendencies independently. Study 1 ( N = 337) assessed moral approval of stocks: People scoring higher on either deontological or utilitarian response tendencies disapproved of investing in sin, but not conventional, stocks. Study 2 ( N = 402) replicated this effect for willingness to invest in companies abandoning (vs. retaining) socially responsible policies. Study 3 ( N = 558) confirmed earlier findings using more conservative measures. These findings clarify the psychology of morally questionable investment decisions.

Risk and Responsibility: Religion and Ethics in Socially Responsible Investment Practices

Socially responsible investment (SRI) has become a major intervention in global investment practices that responds to the power of institutional investors to affect corporate practice. While SRI grew out of the decisions made by churches to curtail investment in so-called “sin stocks” (companies which profited from alcohol, tobacco and gambling), little work has been done to explain why such a dramatic difference in investment strategy would occur or how it ought to impact the investment decisions of individual Christians and their faith communities. This paper explores how social institutions with a religious character determine how to balance the risk of inflicting harm on those institutions with responsibility for transforming the economic order through making investment decisions. Using data collected from shareholder proposals in corporate proxy filings and interviews with investment managers, we develop a typology of theologically grounded approaches to risk and responsibility.

Industry-Level Impact of Environmental, Social and Governance (ESG) Factors for Alternative Investment

This study takes S&P500 companies’ ESG disclosure score and Environmental，Social and Governance disclosure score separately and using SVD algorithm to get the industry-level ESG score graphs. Through analyzing the graphs, we found that the leisure products, tobacco, automobiles industries occupied the top behaviour under the total ESG disclosure score, which deserves to mention that the tobacco, which is normally regarded as the sin stock and shunned by the investors, ranks second among all the industries. For Environmental, Social and Governance disclosure score separately, leisure products, real estate management & devel, tobacco industries occupy the first place respectively, and the disclosure score for Governance for all industries is overall higher than Social and Environmental. In conclusion, this study provides guidance on stock recommendation for ESG investors.

Legal Framework and Sin Stock Performance

Legal Framework and Sin Stock Performance

Shunned stocks and market states

Hong and Kacperczyk (2009, The price of sin: The effects of social norms on markets. Journal of Financial Economics 93(1), 15–36) document that ‘sin stocks’ (alcohol, tobacco, and gambling) earn relatively high returns on a risk-adjusted basis. We revisit their original study with an updated sample. Contrary to the stylized facts that prominent anomalies attenuate out-of-sample or in the post-publication period (McLean and Pontiff 2016, Does academic research destroy stock return predictability? The Journal of Finance 71, 5–32), we document that the superior performance of sin stocks has persisted over the most recent decade (2009–2018). This is consistent with the increased popularity of socially responsible investing over recent decades, pushing more norm-constrained investors away from sin stocks. Further analyses suggest that sin stocks outperform in low-liquidity states and in high-uncertainty states and are recession-proof. Overall, our work supports the shunned stock hypothesis and indicates the price of sin stocks is alive and well.

The effect of gender and parenting daughters on judgments of morally controversial companies.

Earlier findings suggest that men with daughters make judgments and decisions somewhat in line with those made by women. In this paper, we attempt to extend those findings, by testing how gender and parenting daughters affect judgments of the appropriateness of investing in and working for morally controversial companies ("sin stocks"). To do so, in Study 1 (N = 634) we investigate whether women judge the prospect of investing in sin stocks more harshly than men do, and test the hypothesis that men with daughters judge such investments less favorably than other men. In Study 2 (N = 782), we investigate the willingness to work in morally controversial companies at a significant wage premium. Results show that-for men-parenting daughters yields harsher evaluations of sin stocks, but no evidence that it lowers the propensity to work in such companies. This contrasts to the effect of gender: women reliably judge both investment and employment in morally controversial companies more harshly than men do. We suggest that an aversion towards morally controversial companies might be a partial determinant of the gender gap in wages.

Sin stocks and ESG scores: Does the nature of your business really matter?

Sin stocks and ESG scores: Does the nature of your business really matter?