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The Determinants of Sin Stock Returns: Evidence on the European Market

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  • Julie Salaber

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    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX)

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    Abstract

    This article deals with the time-series variation in average sin stock returns – returns on publicly-traded companies involved in producing tobacco, alcohol, and gaming. Next to nothing has been written about this class of stocks, especially on the European stock market. The hypothesis I explore in this paper is that sin stock returns depend on legal and cultural characteristics such as religious preferences, the level of excise taxation, and the degree of litigation risk. Using data on 18 European countries over the period 1975-2006, my results show evidence that Protestants are more “sin averse” than Catholics, and require a significant premium on sin stocks. Moreover, sin stocks have higher risk-adjusted returns when they are located in a country with high excise taxation; and sin stocks outperform other stocks when the litigation risk is higher, even after controlling for well-known risk factors such as market capitalization and book-to-market ratio. These findings suggest that sin stock returns depend on both legal and religious environments of each country.

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    File URL: http://halshs.archives-ouvertes.fr/docs/00/17/02/19/PDF/SinStockReturns200703.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number halshs-00170219.

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    Date of creation: 06 Sep 2007
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    Handle: RePEc:hal:wpaper:halshs-00170219

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00170219/en/
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    Related research

    Keywords: European markets; sin stocks; religion; taxation; litigation.;

    References

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    1. Rene M. Stulz & Rohan Williamson, 2001. "Culture, Openness, and Finance," NBER Working Papers 8222, National Bureau of Economic Research, Inc.
    2. Jeffry Jacob & Thomas Osang, 2007. "Values, Beliefs and Development," Departmental Working Papers 0705, Southern Methodist University, Department of Economics.
    3. RAFAEL LaPORTA & FLORENCIO LOPEZ-de-SILANES & ANDREI SHLEIFER & ROBERT W. VISHNY, . "Legal Determinants of External Finance,"," CRSP working papers 324, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    4. Sijbren Cnossen, 2006. "Alcohol Taxation and Regulation in the European Union," CESifo Working Paper Series 1821, CESifo Group Munich.
    5. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
    6. Eugene F. Fama & Kenneth R. French, . "Value Versus Growth: The International Evidence," CRSP working papers 449, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    9. Hilary, Gilles & Hui, Kai Wai, 2009. "Does religion matter in corporate decision making in America?," Journal of Financial Economics, Elsevier, vol. 93(3), pages 455-473, September.
    10. Ozgur S. Ince & R. Burt Porter, 2006. "INDIVIDUAL EQUITY RETURN DATA FROM THOMSON DATASTREAM: HANDLE WITH CARE!," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 29(4), pages 463-479.
    11. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
    12. Sijbren Cnossen, 2006. "Alcohol taxation and regulation in the European Union," CPB Discussion Paper 76, CPB Netherlands Bureau for Economic Policy Analysis.
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    Cited by:
    1. Leventis, Stergios & Hasan, Iftekhar & Dedoulis , Emmanouil, 2013. "The cost of sin: The effect of social norms on audit pricing," Research Discussion Papers 13/2013, Bank of Finland.
    2. El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck C.Y. & Mishra, Dev R., 2011. "Does corporate social responsibility affect the cost of capital?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2388-2406, September.

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