Returns, Information Disclosure, and Corporate Philanthropy of Sin Firms

Abstract

Sin stocks are shunned by institutional and retail investors. As a result, sin stocks are perceived as risky necessitating risk mitigation strategies. Using 52,234 firm-year observations from 1981-2012, we study the risk management behavior of sin firms. We examine the disclosure of private and public information and find that sin firms have better earnings quality but are less likely to disclose private information. Finally, sin firms are more likely to engage in corporate philanthropy in order to position themselves as good corporate citizens. Overall, it appears that sin firms are more likely to engage in behaviors that improve the image of the firm. However, in spite of these risk mitigation behaviors, we find the yearly difference in implied cost of equity between sin and non-sin firms is 0.958%.

Keywords: Sin Stocks, Social Norms, Risk Mitigation Behavior