Measuring Business Social Irresponsibility: The Case of Sin Stocks

71 Pages Posted: 30 Mar 2023 Last revised: 10 Jan 2024

See all articles by Hamid Boustanifar

Hamid Boustanifar

EDHEC Business School

Patrick Schwarz

University of Duisburg-Essen - House of Energy Markets and Finance

Date Written: March 21, 2023

Abstract

Negative screening (of ”sin” stocks) is one of the most common strategies used by socially responsible investors. There is a debate about whether (and how much) these exclusions affect the cost of capital for targeted firms. The existing literature identifies sin companies using industry classification codes (IC). We propose an alternative continuous measure of firms’ exposure to sin activities (sinfulness) based on textual analysis (TA) of their annual reports. Sinfulness captures both cross-sectional and time-series variation in firms’ exposure to sin activities. The correlation between the IC and TA sin indicators is only 0.69, with twice as many sin stocks in TA than in IC. TA reveals several important false positive and numerous false negative sin stocks in IC. While equal- and value-weighted portfolios of TA-identified sin stocks reveal no abnormal returns, a sinfulness-weighted portfolio earns an annualized Fama-French 6-factor alpha of 5%. Further tests suggest that the abnormal performance is not explained by crash risk or mispricing, but is significantly related to litigation (legal) risk.

Keywords: Business social responsibility, Sin stocks, Textual analysis

JEL Classification: G11, G12, G14, D71

Suggested Citation

Boustanifar, Hamid and Schwarz, Patrick, Measuring Business Social Irresponsibility: The Case of Sin Stocks (March 21, 2023). Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2023, Available at SSRN: https://ssrn.com/abstract=4395028 or http://dx.doi.org/10.2139/ssrn.4395028

Hamid Boustanifar (Contact Author)

EDHEC Business School ( email )

393 Promenade des Anglais – BP 3116
Nice, 06202
France

Patrick Schwarz

University of Duisburg-Essen - House of Energy Markets and Finance ( email )

Universitätsstrasse 2
Essen, 45141
Germany

HOME PAGE: http://sites.google.com/view/patrick-schwarz

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