Sin Stocks Research Articles

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

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.

Political Party Affiliation of the President, Majority in Congress, and Sin Stock Returns

We find that in contrast to the stock market, which performs better during Democratic presidencies, “sin” stocks—publicly traded producers of tobacco, alcohol, and gaming—perform better during Republican presidencies and even more so when the Republican presidency is accompanied by a Republican majority in at least one chamber of Congress. We examine whether sin firms use contributions to establish connections with politicians and find that sin firms contribute more to Republican candidates and that these contributions are greater when Republicans are in power. We also find a positive relation between political contributions and future returns. The relation is stronger for contributions to Republicans.

Do different cultural values affect the excess return of sin stocks?

Several studies have demonstrated that sin stocks have different characteristics in comparison with other stocks. However, previous research that examines sin stocks has generally assumed that countries are similar in their stance towards sin stocks or that other nations are similar to the US and have some degree of disapproval of sin stocks. This study introduces a new model and shows that sin stocks are treated differently between countries depending on its culture and religion. The question that is answered throughout this study is: “What is the relationship between different cultural values of countries as measured by Hofstede and the excess return of sin stocks?” When regressing the excess returns against the dimensions of Hofstede, the dimensions masculinity versus femininity and indulgence versus restraint have negative coefficients that are significant at a 5% level. This implies that when nations are considered more masculine they are more likely to invest in sin stocks. On the contrary, their feminine counterparts are more likely to refrain from investing in sin stocks. When a country scores high on indulgence it is more likely to invest in sin stocks, whereas countries that score high on restraint are more likely to refrain from investing in sin stocks. The results are similar when using the three-factor model; consequently the interpretation of the results remains the same. When controlling for religion, only masculinity versus femininity remains significant. The model seems robust; it can handle variability and remain effective.

Why Sin Stocks Have Abnormal Returns? An Experimental Investigation on the Effect of Corporate Social Responsibility on Investor's Investment Behaviour and Firm's Choice of Production Methods

In classical finance theory, social preference is assumed to play no role in investor’s portfolio choice, as the optimal portfolio is formed by considering return and risk of the stocks. While it has been known that sin stocks have abnormal returns, the causality (i.e., whether it is caused by investor’s social preference) of the phenomenon remains to be investigated. This paper first uses a data set on portfolio of 78,000 retail investors to investigate the relationship between investment in sin stocks and religiosity. We find that investors underweight sin stocks, and the degree of underweighting is positively correlated with the degree of religiosity of the region where investors reside. This is the first result reported in the literature for the correlation between investors’ moral concern and holding of sin stocks. The result is robust after we control for holding in familiar stocks, lottery stocks, and demographics. Then, we conduct laboratory experiments to cleanly identify the casual relationship between concern for corporate social responsibility (CSR) and investment. The first experiment shows that investors avoid holding sin stocks despite its return dominates the non-sin stocks. The second experiment shows that the concern for CSR induces firms to adapt clean production or to outsource production process with pollution. Overall, our paper provides the first causal evidence in the literature that investor’s concern for social responsibility leads them to underweight sin stocks. Our result highlights the importance of social preference in the financial market, and its implications for asset pricing theories.

The Price of Sinn Aversion: Ivory Tower Illusion or Real Investable Alpha?

In their pioneering work, Hong & Kacperczyk [HK] (2009) document a significant outperformance of so- called sin stocks: publicly traded companies involved in producing alcohol, tobacco and gaming. Drawing on theories of neglected stocks and segmented markets, the authors suggest this outperformance to be due to a shunning effect caused by norm-constrained institutional investors who effectively pay a price for sin aversion. Motivated by a line of criticism against their research design, this study re-examines whether the sin stocks premium recorded by HK is actually investable for real world investors or derives from an ‘ivory tower style’ research design? We limit our analysis to only those stocks included in the global equity index benchmarks of institutional investors thereby excluding thousands of stocks usually considered too illiquid in practice. Among these stocks, we still document the sin stock premium in HK’s equal weighted sin-industry portfolios. Equal-weighted sub-industry portfolios are, however, practically barely investable for many institutional investors with their value-weighted benchmarks and are, if analysed in Fama-French models, exposed to a small cap bias in two ways. First, if small cap firms outperform large cap firms, then the equal-weighted portfolio is likely to outperform its value-weighted equivalent and a value-weighted market. Hence, we value-weight our sin-industry portfolios, which leads the premium for gambling firms to disappear. Second, Fama-French’s model controls for return differentials between small cap and large cap firms within all industrial sectors. The model is not designed to capture return differentials between small cap and large cap firms in a single sector such as consumer goods, which could drive the returns of sub-industries in this sector such as alcohol and tobacco. Hence, we add within sector control variables to our model which leads to a complete disappearance of any premium to sin stocks at the global level. When we conduct the same analysis in HK’s purely US universe, the sin stock premiums disappear even more convincingly. This implies that the sin stock premium and the price of sin aversion could be artefacts of an ivory tower research design and are not necessarily applicable to the real world.

Sin stock returns and investor sentiment

Abstract This paper studies the impact of investor sentiment on a portfolio formed of sin stocks—publicly traded companies in the alcohol, tobacco, and gaming industries. Using a variety of sentiments-augmented asset pricing models, this research examines whether investor sentiment is a risk factor for sin stock returns. It also studies if the abnormal returns – found in the literature – for sin stocks persist after controlling for investor sentiment. Furthermore, we utilize a generalized autoregressive conditional heteroscedasticity-in-mean (GARCH) model to study the relationship between investor sentiment and the sin portfolio's conditional volatility. Our findings show that both individual and institutional investor sentiment are priced factors in sin stock returns. Furthermore, after controlling for the role of investor sentiment, the asset-pricing results suggest that the abnormal returns for sin stocks found in previous studies disappear. The results from the GARCH models indicate that investor sentiment has a significant impact on sin stocks’ conditional volatility.

Do social factors influence investment behavior and performance? Evidence from mutual fund holdings

Abstract We study the economic significance of social dimensions in investment decisions by analyzing the holdings of U.S. equity mutual funds over the period 2004–2012. Using these holdings, we measure funds’ exposures to socially sensitive stocks in order to answer two questions. What explains cross-sectional variation in mutual funds’ exposure to controversial companies? Does exposure to controversial stocks drive fund returns? We find that exposures to socially sensitive stocks are weaker for funds that aim to attract socially conscious and institutional investor clientele, and they relate to local political and religious factors. The financial payoff associated with greater “sin” stock exposure is positive and statistically significant, but becomes non-significant with broader definitions of socially sensitive investments. Despite the positive relation between mutual fund return and sin stock exposure, the annualized risk-adjusted return spread between a portfolio of funds with highest sin stock exposure and its lowest-ranked counterpart is statistically not significant. The results suggest that fund managers do not tilt heavily towards controversial stocks because of social considerations and practical constraints.

Vice versus virtue investing around the world

This paper assumes the role of advocatus diaboli by testing whether an investment in sin stocks can financially outperform an investment in socially responsible stocks. We create a set of global, regional, and domestic portfolios consisting of a large number of stocks belonging to what could be labeled as a sextet of sin: adult entertainment, alcohol, gambling, nuclear power, tobacco, and weapons. We assess the performance of sin stocks against well-known benchmarks, and rerun the identical assessment for socially responsible stocks. We find no compelling evidence that sin stocks, or socially responsible stocks outperform or underperform, and establish this result in several ways. Consistent with this finding, a hedge portfolio long in sin stocks and short in socially responsible stocks does not outperform the market, either. However, sin stocks are substantially tilted towards value, bear less market risk with an average beta below one, and are prone to momentum relative to socially responsible stocks.

Deviations from Norms and Informed Trading

AbstractInvestment managers are subject to personal and institutional norms that can constrain their investment choices. We conjecture that norm-constrained investors deviate from such norms only when they have compelling information, and we predict that deviating investments earn relatively high abnormal returns ex post. Consistent with our conjecture, we find that institutions averse to holding lottery-like stocks or sin stocks earn relatively high abnormal returns when they choose to hold such stocks. We find similar but weaker results for deviations from broader style categories. Overall, our evidence indicates that deviations from established institutional or social norms signal informed investing.

International Variation in Sin Stocks and Its Effects on Equity Valuation

International Variation in Sin Stocks and Its Effects on Equity Valuation

International variation in sin stocks and its effects on equity valuation

We examine the impact of differences in time varying social views towards sin stocks across G20 nations on firm valuation and excess returns. Sin stocks have an 8% lower equity valuation in countries where society is strongly against such industries. After controlling for other factors, sin stocks have excess returns of about 1–2% annually. However, these returns are largely arbitraged away in nations without capital and investment controls, but persist in countries with capital restrictions. These results are robust to proxies for litigation risk, transparency, growth opportunities, sin measures, and alternative measures of firm valuation.

Socially Responsible Investment in France

Socially responsible investment (SRI) in France is based on a “best in class” approach as opposed to the “exclusion” approaches used in other countries such as the United States or United Kingdom, where the rejection of sin stocks has been dominant historically. The objective of this research note is to examine whether the French SRI market, by focusing more on financial rather than on ethical considerations, compared with other countries such as the United States, the United Kingdom, or even Sweden, may lead to a form of “mainstreaming” of SRI processes. The authors explore several convergent mechanisms. First, the authors analyze the importance of the mainstreaming issue in the history of SRI as well as in the contemporaneous debate in the academic literature on the links between financial and extrafinancial (SRI) performance. Second, the authors review the role played by ethical finance laws adopted in France in the early 2000s in the development of the SRI market. Finally, the authors discuss the results of a survey of French SRI analysts working both for large institutional investors and asset managers in France in 2009.

Religion and returns in Europe

Drawing on social identity and social impact theory, this paper is the first to investigate the impact of religious preferences on share prices and expected returns at the country level. Using data from 12 European countries, our findings suggest that religion has a significant effect on the share price of companies whose activities are considered unethical, i.e., tobacco manufacturers and alcohol producers. The share price of these companies (called sin stocks) is depressed when they are located in a predominantly Protestant environment (relative to a Catholic environment). With investors in Protestant countries being more sin averse than in Catholic countries, they insist upon higher expected returns on sin stocks. Conversely, religious preferences do not have the same impact on the performance of other companies, e.g. socially responsible companies. Our results are robust to various methodologies and controlling for several firm-specific, industry-specific and country-specific characteristics.

Does it Really Hurt to be Responsible?

Prior literature on socially responsible investment has contended that excluding “sin stocks” from a portfolio (negative screening) will reduce performance and increase risk. Further, incorporating stocks of firms with positive social responsibility scores (positive screening) will improve performance and reduce risk. We simulate portfolios designed to mimic typical equity mutual funds’ holdings and investigate these propositions. We remove the potentially confounding influences of differences in manager skill, transaction costs and fees, and conduct a clean experiment on the effect of positive and negative portfolio screening. We find no difference in the return or risk of screened and unscreened portfolios. We conclude that a typical socially responsible fund will neither gain nor lose from screening its portfolio.

Conservation, Discrimination, and Salvation: Investors’ Social Concerns in the Stock Market

Stocks appear to have investor clienteles based on their business practices and products. The variety in expressive benefits each individual receives from owning controversial stocks causes them to modify their portfolio to accommodate their beliefs. We examine the ownership of firms with social concerns and sin stocks (tobacco, alcohol and gambling). Women tilt their portfolios towards stocks with progressive labor policies for women and minorities. Younger investors avoid companies with poor environmental records but seek companies with progressive labor policies. Democratic voters favor stocks with progressive policies regarding women/minorities and gays/lesbians and are less likely to own sin stocks. Christian objections to homosexuality lead their members to invest less in stocks with progressive labor policies for gays and lesbians. The Christian denominations vary, though, in regard to sin stocks. Catholics are more likely while Mormons are less likely to own a sin stock relative to other investors. Socially responsible investors are clearly not all alike. Social characteristics that are important to one investor may not be important to another socially conscious investor.

Socially Responsible Investment in the alcohol industry: an assessment of investor attitudes and ethical arguments

I examine and evaluate the ethical standards and arguments that Socially Responsible Investment (SRI) investors use when they deselect the alcohol industry and alcohol corporations. The alcohol industry was the first industry excluded by SRI investors and is, relative to fund size, the second most prominent negative screen (after tobacco). I discuss the role of shareholder democracy in the alcohol industry, review some evidence on the financial effects of SRI on sin stocks and investigate the motivations that SRI investors may have to eschew investment in the alcohol industry (almost no motivation can be found). I discuss a number of ethical issues that are salient in the alcohol industry and that ought to concern ethical investors. I draw attention to, in particular, the marketing of alcopops (flavoured alcoholic beverages or malternatives such as Smirnoff Ice and Bacardi Breezer), and strategies involving so-called beer girls. This prepares the way to a reconstruction of two kinds of arguments that SRI investors might implicitly adhere to when they put a negative screen on alcohol: a Public Goods Argument and a Religious Values Argument. I show that the Public Goods Argument is problematic because it risks democratic legitimacy and effectiveness, and that while the Religious Values Argument is a coherent defence for individual investors accepting particular religious views, it is unacceptable if used by institutional investors forcing religious values upon involuntary participants when no societal unanimity concerning these religious values exists. Pension funds and health-care plans are examples of such investors. Finally, I provide an alternative Ethical Issues Argument and defend the claim that there are no good moral reasons for institutional SRI investors to circumvent the alcohol industry; rather, they should use shareholder democracy to make alcohol corporations address the ethical issues lest these issues will never be addressed by the corporations themselves.

Saints versus Sinners. Does morality matter?

Social norms constrain investors from investing in “sin stocks”, affecting the returns and corporate financial policies of such firms (Hong and Kacperczyk, 2009). This paper finds that “Saints” are influenced by social norms. In almost all instances, where an effect on “Sinners” is positive (negative), we find that the effect for ‘Saints’ is negative (positive). Hong and Kacperczyk provide evidence that social norms prevent ‘evil’ outcomes. This paper finds that social norms exert positive pressure on both investors and firms in the US equity market.

The price of sin in the Pacific-Basin

Hong and Kacperczyk (2009) argue that social norms against sin stocks influence investor behavior and corporate financial policies. This paper examines “sin” stocks in seven Pacific-Basin markets that exhibit a variety of social norms: Australia, India, Japan, South Korea, Malaysia, New Zealand and Singapore. In doing so, we provide further evidence on the pricing of sin stocks. Consideration of measurable cultural differences between the markets suggests the price of sin is a manifestation of groupthink.

Shades of Grey: Capital Structure Decisions of Non-Sin vs. Sin Firms in the G20 Nations

This paper examines the impact of social norms on firm value and the capital structure of firms engaged in the production of tobacco, alcohol, and gambling services ('sin stocks') in the G20 nations. We first demonstrate that sin stocks are undervalued in countries where social norms are strongly against such firms. The negative impact on these firms’ equity valuation (roughly 8% on average) leads them to rely more heavily on debt financing. Specifically, we show that sin stocks compared to similar non-sin stocks have higher levels of debt (roughly 4 times), a greater probability of taking on debt, and a lower debt cost of capital (after controlling for debt load). Finally, we show that specific market behavior towards sin stocks is influenced by other country specific social norms like the degree of individualism and risk aversion. Our results are robust to alternative measures of firm valuation and debt load.

Are Sin Stocks Paying the Price for Accounting Sins?

Recent empirical evidence suggests that sin stocks—publicly traded stocks in the gaming, tobacco, alcohol, and adult entertainment industries—are neglected by stock market participants because of social norms, regulatory scrutiny, and litigation risk. Consequently, these firms experience low institutional ownership, low analyst following, and higher expected returns. This paper examines whether higher information risk in the form of poor financial reporting quality offers an explanation for the higher expected returns of sin firms. Inconsistent with this explanation, we find that the financial reporting quality of sin firms is superior relative to a variety of control groups along two dimensions: predictability of earnings for future cash flows and timely loss recognition. These results imply that, despite superior returns and higher financial reporting quality, investors are willing to neglect sin stocks and instead bear a financial cost in order to comply with societal norms and reflect non-financial tastes in their portfolio.