Final ppt proposal.pptx

Resiliency of ESG, sharia compliant, and sin stocks during
economic meltdown: An Analysis of the Exogenous COVID-
19 and 2007-08 Financial Crisis Market Crash
http://www.free-powerpoint-templates-design.com

Hafiz Muhammad Arslan
Student I.D: 3820192035

Contents
Chapter 01: Introduction
Chapter 02: Literature Review
Chapter 03: Resilience of ESG stocks after COVID-19
stock market crash and financial crisis 2007-08
Chapter 04: Resilience of Sharia compliant stocks after
COVID-19 stock market crash and financial crisis 2007-08
Chapter 05: Resilience of Sin stocks after COVID-19 stock
market crash and financial crisis 2007-08
Chapter 06: Conclusion

Ever since the beginning of stock markets, earnings have been the main focus of investors.
However, we are now reaching a new era where we see more conscious investment strategies taking
the lead. This has in turn led to that the investing trends for the past few years have been all about
investing in sustainable and ethical companies. Other avenues also present besides ESG stocks,
such as sin-stocks and sharia compliant stocks.
Although philosophy of Sin stocks and Sharia compliant stocks is exactly opposite to each other but
resilience of stocks, lower volatility and high abnormal returns during bad times are the common
features of these three categories of stocks.
1. Why we select this study?

Investment strategies for normal course of economies like diversification totally fails at the time of economic
meltdown (Page and Panariello 2018), or a sudden crash because of external shock such as COVID-19 and
financial crisis 2007-08.
Stocks low volatility, resilience and high abnormal returns are the features investor wish must present in their
portfolios at the time of market crashes. Previous literature such as (Albuquerque, Koskinen et al. 2019, Leal and
Napoletano 2019, Albuquerque, Koskinen et al. 2020, Albuquerque, Koskinen et al. 2020, Demers, Hendrikse et
al. 2020) has identified these features in ESG, sin stocks and sharia compliant stocks.

For quite some time now, practitioners have taken the view that ESG activities create value for firms and their
shareholders. The academic literature has shown a positive association between ESG and financial performance.
The Islamic finance literature is very broad. Several studies report that Sharia-compliant products and funds, in
general, have demonstrated better performance compared to their conventional counterparts during the turbulent
periods (Hoepner, Rammal et al. 2011, Ashraf 2013, Alqahtani, Mayes et al. 2017, Boo, Ee et al. 2017, Alexakis,
Izzeldin et al. 2019, Asmild, Kronborg et al. 2019, Safiullah 2020).
For example, the Global Financial crisis triggered by imprudent lending practices, poor risk management and
accounting models, did not affect the Islamic financial system in a similar way, since many of those practices are
forbidden under Shariah laws.
The global financial crisis can be viewed as an actual assessment of the Islamic finance industry's strength and its
capability to prove itself a more reliable alternative to the conventional financial system.

1.2 COVID-19, Financial crisis 2007-08 and stock market crashes
The Coronavirus pandemic (COVID-19), which has been termed a global health and societal emergency,
had a devastating effect on business and finance worldwide. The COVID-19 crisis is believed to become
an economic disaster comparable with the Great Depression and the Global Financial Crisis, that will
affect the financial system, economy and society in the same way as was affected during financial crisis
2007-08 in USA and then globally.
Although COVID-19 at the inception was a health disaster and the pace from which it has affected global
stock markets with persistent global presence due to its contagion nature has never been observed by
humans but the consequences of this health disaster was merely different for stock markets than the
consequences of 2007-08 US financial crisis and the resultant stock market crashes globally.

COVID-19 pandemic presents an unparalleled shock all over the world.
First, the COVID-19 crisis and the subsequent economic lockdown is an unexpected shock to global stock markets.
Second, it is an exogenous shock that originated out of public health concerns, not because of economic
conditions.
Third, the pandemic resulted in a stock market crash. The stock market in the United States peaked on February 19,
and a mere month later prices had declined by almost 30%. The unexpected and exogenous nature of the shock and
its speed suggest that firms had very limited ability to respond in a timely fashion to the unfolding crisis.
Overall, these aspects of the crisis as seen in COVID-19 and US financial crisis 2007-08 induced investment
industry to identify investment strategy that is safe and results in less volatility, high resilience in the returns of
portfolios after crashes and better abnormal return during economic crisis.

Prior studies published work on sin stocks, ESG stocks and Sharia-compliant stocks separately and mostly
focused sin stocks as controversial and deprived stocks, while ESG stocks as ethical stocks where investor can
absorb losses because of its investment preferences because of which its better risk adjusted return
performance normally and also during bad times. Whereas Sharia-Compliant stocks are treated in the same
way as ESG stocks are from investors with a mere difference of operational business models of these firms as
compared to ESG stocks. This is the first study which first of all will focus on the return difference of these
stocks, then will analyze resilience of these stocks during global disasters such as COVID-19 and 2007-08 US
financial crisis, make comparison of these stocks with each other. The output of this study would be to devise
better investment strategy for normal times of stock markets and specifically bad times of stock markets.

Background of the study
Stocks with high ES ratings were not the only stocks to perform better during the first quarter of 2020. Acharya and
Steffen (2020) provide evidence that firms with access to liquidity perform better during the first quarter. Ramelli
and Wagner (2020) show that nonfinancial firms with higher cash holdings and lower financial leverage are less
affected than other firms. Similar evidence is also provided by (Fahlenbrach, Rageth et al. 2020). Alfaro, Chari et al.
(2020) and Hassan, Hollander et al. (2020) show that stocks that are less exposed to the COVID-19 pandemic
perform better. Pagano, Wagner et al. (2020) demonstrate that firms that are less affected by social distancing have
higher returns during the crisis. Landier and Thesmar (2020) demonstrate that changes in analysts’ forecasts about
future corporate earnings explain the overall decline, but not the short-term price movements, in stock prices during
COVID-19. Shan and Tang (2020) document that Chinese firms with greater employee satisfaction appear to endure
the COVID-19 stock market downturn better than other firms, supporting employee satisfaction as one dimension of
ES policies creating shareholder value (Edmans 2011).

In a cross-country analysis, Ding, Levine et al. (2020) provide evidence that firms with stronger balance sheets, less
exposure to COVID-19, and more sustainable operations perform better during the first quarter. Cheema-Fox,
LaPerla et al. (2020) show that firms that protect their workforce and supply chains during the stock market collapse
have higher returns than other firms.
In addition to affecting stock prices, COVID-19 dramatically affected corporate financing. Li, Strahan et al. (2020)
document an unprecedented increase in commercial and industrial loans in banks’ balance sheets, as nonfinancial
corporations draw funds from credit lines during the three last weeks in March. Halling, Yu et al. (2020) present
evidence that bond issuance increases significantly after the middle of March, especially for highly rated bonds.
Firms choose to issue bonds with longer maturities, perhaps anticipating that cash flows will be low for a long time.

Research Significance
This is the first study which is seeing these stocks as an investment strategy to reduce systematic risks in
portfolios during disasters, crashes and turmoil time periods. Main focus is to make comparison of resilience,
price volatility and positive abnormal returns of these stocks with each other and with the rest market specifically
during crisis time period so, that diversification don’t fail during worst case scenario in stock markets.

Research Questions
1. To what level sin stocks, sharia compliant stocks and ESG stocks are resilient after
COVID-19and 2007-08 financial crisis?
2. To what level sin stocks, sharia compliant stocks and ESG stocks return volatility
varies after COVID-19 crisis and financial crisis 2007-08?
3. To what level US government Monitory and fiscal bailout after COVID-19 and
financial crisi 2007-08 results in abnormal returns of sin stocks, sharia compliant
stocks and ESG stocks?

Research objectives
1. To messure the resilience of sin stocks, sharia compliant stocks and ESG stocks after
COVID-19 and 2007-08 financial crisis.
2. To measure the return volatility of sin stocks, sharia compliant stocks and ESG stocks
after COVID-19 and 2007-08 financial crisis.
3. To measure the abnormal returns of of sin stocks, sharia compliant stocks and ESG
stocks after COVID-19 and 2007-08 financial crisis bailout packages announcements.

Authors Findings
Fromlet, 2001; Ngoc, 2014 behavior of individual investors and/or even institutional investors in secured
trading, irrespective of any type (frontier, emerging or developed) of stock markets
Tan et al., 2008 academic researchers have also paid attention with keen interest towards herding
effects, because its influence on changes in stock prices could be attributed to risks
and return models, and could obviously impact the concept of assets pricing
theories
Caparrelli et al., 2004 herding investors tend to act generally as pre-historic investors, who had inadequate
knowledge of their surroundings and to provide information, support and security to
each other, gathered together in small groups
(Waweru et al., 2008 The behavioral investors, on the other hand, prefer to sell their past winning stocks
in order to meet the losses occurred during decisions of their stock trading
Behavioral finance theories which explain resilience and volatilities of stocks during crisis

Author Findings
Fisher & Mandel,
2021
very rightly stated that: “We have an irrational tendency to be less willing to
gamble with profits than with losses”, The prospect theory can also be known as
the loss-aversion theory. Prospect theory states that people's perceptions of gain
and loss are skewed.
Whereas, Tvede
(2002)
opposed this theory since it tends to show natural human behavior when
investors are almost underway to face risks, ambiguity and insecurity in case of
financial disasters especially during COVID-19 and global financial crisis 2007-08
Filbeck et al., 2005 There are two approaches pertaining to decisions to be undertaken by investors.
The first is “Prospect Theory”, whereas the second is termed as “Expected Utility
Theory (EUT)” and both are observed from different angles and taken in
appropriate perspectives.
Tversky & Kahneman,
1981)
Moreover, wealth function is generally concave and tends to be less steep for
profits, but steeper and convex for any losses
Fisher & Mandel,
2021
Mostly people under-weigh outcomes with uncertainty and probabilities in
comparison with certain and secure outcomes and are inclined to response in
different manners within similar environment, in the context of profits or losses
Prospect theory

Authors Findings
Jensen and Meckling
(1976)
Found that agency cost might be increased if problems of conflict arise
Aggarwal et al. (2012) Explored that ineffective corporate governance is also a cause of agency
issues.
(Klein, 2002; Xie et al.,
2003; Kent et al., 2010).
The agency theory is said to be the most important theory in term of
corporate governance which is more effective in solving the problems of
agency with the help of better transparency and good quality of financial
information
(Eggers & Hainmueller,
2014; Wu & Cheng, 2011).
Managers being the considerable part of the firm may take some worst
decisions for their private gains at the cost of shareholders
Corporate finance theories which explain resilience and stocks volatilities during crisis

Authors Findings
Salancik and Pfeffer (1978) introduced the resource dependency theory according to which organizations
depends on the resources neded for production such as land, labour and capital
and for these resourses acquisition there is competition in the market between
firms
Hillman & Dalziel, 2003;
Nicholson & Kiel, 2007)
Theorists of resource dependence claim that a diverse and autonomous board of
directors will enhance organizational operations, especially as the operational
environment changes drastically
Craven and Marston, 1999 If a firm does not follow the same business line process and procedures of
disclosures then it might take as signal which the firm is hiding from bad news
Ross (1977) The implicit inconsistencies between owners and managers lead managers to
satisfy users' specific knowledge needs.

Chapter 3:
Resilience of ESG stocks after COVID-19 stock market crash and financial
crisis 2007-08
Introduction
COVID-19 has proven a global disaster of the 21st century because it has shattered stock markets globally and the
scale of losses from COVID-19 is unmatchable since 1928 global depression. Same was the case with global financial
crisis 2007-08 caused by mortgage-backed securities defaults an spread globally which meanwhile bailed out by US
government. Booth COVID-19 and global financial crisis 2007-08 are global events and stock markets crashed
significantly in booth events. For the sake of hedging, investors always diversify their investments but the rule of
diversification itself fails when whole markets collapse. So it was felt by analyst and investors’ community to identify
some sectors or category of stocks in the stock markets which show better resilience after the crisis is over. This is
what researchers have been felt regarding ESG stocks and it seems that ESG stocks show better resilience after global
financial crisis because of less elastic investor category in these stocks. Stocks with high ESG ratings were not the
only stocks to perform better during the first quarter of 2020.

In addition to affecting stock prices, COVID-19 dramatically affected corporate financing. Li et al. (2020) document
an unprecedented increase in commercial and industrial loans in banks’ balance sheets, as nonfinancial corporations
draw funds from credit lines during the three last weeks in March. Halling et al. (2020) present evidence that bond
issuance increases significantly after the middle of March, especially for highly rated bonds. Firms choose to issue
bonds with longer maturities, perhaps anticipating that cash flows will be low for a long time. Several recent papers
have asserted a positive causal link from ESG activities to firms’ financial performance. Masulis and Reza (2015),
however, use the 2003 Tax Reform Act, which reduced personal tax rates on dividends, as an exogenous event to
show that corporate giving—a component of ESG policies—reduces shareholder wealth. Their findings support the
agency costs viewpoint.
Introduction
Chapter 3:
crisis 2007-08

Theory and Hypothesis Development
To understand why the COVID-19 shock is useful to study the ESG financial performance link, consider the
following two theories of ESG activities based on customer and investor preferences. Albuquerque et al. (2019)
present a model where firms invest in ESG policies as a product differentiation strategy (e.g., Patagonia uses only
organic cotton in its outdoor clothing and supports conservation efforts; Apple is switching to 100% renewable
energy; and TOMS donates a pair of shoes for every pair bought). The benefit of this strategy is a more loyal
customer base and a lower price-elasticity of demand for their products. A less price-elastic demand gives the firm
the ability to charge higher prices and have higher profit margins. In their model, the higher profit margin lowers
operating leverage and thus systematic risk, and increases firm value. If the COVID-19 shock affects consumer
demand, customer loyalty for ESG firms is hypothesized to benefit ESG firms’ stock performance and resiliency.
The literature on sustainable and responsible investments (SRI) provides another hypothesis of how the COVID-19
shock affects the ESG financial performance link
Chapter 3:
crisis 2007-08

El Ghoul et al. (2011) employ instrumental variables estimation and dynamic panel data methods to show
causality from ESG activities to lower cost of capital. Albuquerque et al. (2020) similarly use instrumental
variables estimation to demonstrate a causal link from ESG to reduced systematic risk and increased valuations.
Dimson et al. (2015) and Krüger (2015) use event-study analyses to link ESG events to subsequent firm
financial performance; their method alleviates concerns about reverse causality and omitted variables. Flammer
(2015) employs the regression discontinuity design to show that successful shareholder ESG proposals result in
positive abnormal returns. So, now we can propose the following hypothesis,
H1: ESG stocks can show better resilience during and after economic turmoil created by COVID-19 and
Global financial crisis 2007-08
Chapter 3:
crisis 2007-08

Sample Selection and Data Source
Our main data source on firms’ ESG performance is Thomson Reuters’ Refinitiv ESG database. Refinitiv ESG
evaluates firms’ environmental (E) performance in three categories: resource use, emissions, and innovation. Social
(S) commitments are measured in four areas: workplace, human rights, community, and product responsibility.
Governance (G) is evaluated in three dimensions: management, shareholders, and corporate social responsibility
strategy. Thomson Reuters’ Refinitiv ESG scores have been used in the prior literature (Dyck et al., 2019; Ferrell et
al., 2016).
Chapter 3:
crisis 2007-08

We obtain daily stock returns from Capital IQ North America Daily for the first quarter of 2020 and CRSP from
2017 to 2019. The daily abnormal return is estimated as the difference between the daily logarithm return (i.e., the
logarithm of gross return) of a stock and the CAPM beta times the daily logarithm return of the market. The
CAPM beta is estimated using daily returns from 2017 and 2019 for COVID-19 purpose and from 2006 to 2011
for GFC purpose, and the S&P 500 as the market index. Similarly, the quarterly abnormal return is the difference
between the logarithm of the stock’s gross quarterly return and the CAPM beta times the logarithm of the market’s
gross quarterly return. We then calculate the volatility of stock returns, both raw and CAPM adjusted. Accounting
data for 2019 and 2008 are obtained from Compustat and are used to construct control variables, namely, Tobin’s
q, Size, Cash, Leverage, Return on equity, and Dividend yield. We winsorize all accounting variables at the 1%
level in each tail. We construct a firm-level investor ESG measure based on institutional investors, revealed
preferences. Investors’ ESG preference is estimated using institutional investors’ equity holdings, following recent
studies (Gibson et al., 2020; Starks et al., 2017)
Chapter 3:
crisis 2007-08

Difference-in-difference regression
In our main tests of difference-in-differences regressions, we run the following daily regressions:
Stock Performanceit = β0 + β1ESGtreatmenti * PostCOVIDt +β2ESGtreatmenti *Post fiscalt+ β3Firm FEi+ eit
(3)
The two dependent variables we study are daily abnormal returns and daily return volatility (measured by daily
price range) of firm i on day t during the first quarter of 2020. ESG_treatment is a dummy variable that equals one
for firm i if its ESG rating is ranked in the top quartile in 2018, and zero otherwise. Post_COVID variable is
dummy variable which is equals to one from February 24 to March 31, 2020, and zero before this period.
Post_fiscal is also a dummy variable and equals to one from March 18 to March 31, 2020, and zero before this
period. We control for the second event to have a cleaner identification of the effect of the COVID-19 pandemic.
We include firm and day fixed effects to control for any other unobservable effects, and cluster the standard errors
by firm and day.
Chapter 3:
crisis 2007-08

In Equation (3), the coefficient on the first interaction term (ß1) captures the causal effect of ESG policies on
stock performance during the crisis, whereas the coefficient on the second interaction term (ß2) reflects the
additional effect during the second period when we expect the ESG effect on stock returns to be weakened by
aggressive fiscal and monetary interventions. Stock Performanceit = β0 + β1ESGtreatmenti * Post-GFCt
+β2ESGtreatmenti *Post Bail-outt+β3 Firm FEi+ eit
Chapter 3:
crisis 2007-08

Dependent variables
The two dependent variables we study are daily abnormal returns and daily return volatility (measured by daily
price range) of firm i on day t during the first quarter of 2020. The daily abnormal return is estimated as the
difference between the daily logarithm return (i.e., the logarithm of gross return) of a stock and the CAPM beta
times the daily logarithm return of the market. The quarterly abnormal return is the difference between the
logarithm of the stock’s gross quarterly return and the CAPM beta times the logarithm of the market’s gross
quarterly return.
Independent variables
ESG_treatment is a dummy variable that equals one for firm i if its ESG rating is ranked in the top quartile in
2018, and zero otherwise. Post_COVID variable is a dummy variable which is equals to one from February 24 to
March 31, 2020, and zero before this period. Post_fiscal is also a dummy variable and equals to one from March
18 to March 31, 2020, and zero before this period. Post-GFC is a dummy variable and equal to one from 30 July
2007 to 1st September 2008 and for other period it is zero. Post Bail-out equals one from October 3, 2008 to April
2011, and zero before this period.
Control variables
Tobin’s q, Cash, Leverage, Size, Return on equity and Dividend yield are the control variables used in the
models explained previously.
Chapter 3:
crisis 2007-08

Chapter 4:
Resilience of Sharia compliant stocks after COVID-19 stock market crash and
financial crisis 2007-08
Introduction
Ethical investing
Ethical investing is defined as the use of non-financial ethical and social criteria to select and manage stock portfolios
(Cowton, 1994). Besides expected risks and returns, ethical investing considers the specificities of potential investment.
Ethical investing gives investors the opportunity to invest in companies that are in line with their views, whether they
are based on environmental, religious or political precepts. There is a general perception amongst opponents of ethical
investing that ethical investing will underperform conventional investing for the two following reasons. First, ethical
portfolios are subsets of the market portfolio and therefore they suffer from the lack of diversification. Second,
selecting and monitoring stocks according to ethical screening can be an expensive practice that may ultimately
negatively impact the net return (Bauer et al., 2006).

Ethical investing and Sharia-compliant investment
A more restrictive ethical investing is Islamic investments (also known as Sharia-compliant investments) that must be
in accordance with the principles of Sharia (i.e., the Islamic law) governing all aspects of a Muslim's life. Islamic
investments are not allowed in companies whose core business involves alcohol, gambling, conventional financial
services, entertainment, pork-related products, tobacco, or weapons. In addition, other company screenings are applied
based on certain financial ratios. For instance, companies with unacceptable levels of debt (more than one third of
market capitalization) or impure interest income are excluded from the set of investable stocks. Moreover, companies
with accounts receivables representing more than 33% of the market capitalization are also excluded. Finally,
investments in securities that promise interest payment or investments in derivative securities are not allowed under
the Islamic law, such as bonds, options, and futures contracts (Naughton & Naughton, 2000).
Chapter 4:

Sharia-compliant stocks resilience during COVID-19 and Global financial crisis (GFC) 2007-08
The Coronavirus pandemic (COVID-19) is a global health and societal emergency that had devastating effects
on business and finance worldwide. The COVID-19 crisis has economic consequences comparable with the
Great Depression and the Global Financial crisis. For a rapidly growing $2.4 trillion Islamic Financial
industry that currently involves around 1400 institutions spreading across 80 countries, the outbreak's impact
is not negligible. On the one hand, some Islamic financial markets and instruments demonstrated safe haven
properties during the previous crises (Delle Foglie & Panetta, 2020; Hkiri et al., 2017). On the flip side, the
early evidence from the COVID-19 pandemic shows that Islamic equity markets have not been entirely
immune from this contagious shock (e.g., (Yarovaya et al., 2020).
Chapter 4:

Reviewing Islamic financial institutions in 2008 financial crisis and COVID19 outbreak The COVID-19
outbreak has been the only crisis that has deeply affected the global economy and financial markets since the
2008 financial crisis (Yarovaya et al., 2020). Islamic financial institutions were durable against the 2008
financial crisis (Ahmed, 2010; Ashraf, 2013; Ashraf et al., 2022; Hassan & Kayed, 2009; Kayed & Hassan,
2011; Smolo & Mirakhor, 2010). This mainly was because of Islamic finance bases on the free interest, risk
sharing system and the real economy (Ashraf et al., 2022; Asutay, 2010; Iqbal & Mirakhor, 2011; Mishrif &
Akkas, 2018)
Chapter 4:

We obtain daily stock returns of 576 firms listed in Dow jones Islamic Market US Index (IMUS) from Thomson
Reuters data stream for the period spanning 2007 to 2009 and 2019 to 2021. The daily abnormal return is
estimated as the difference between the daily logarithm return (i.e., the logarithm of gross return) of a stock and
the CAPM beta times the daily logarithm return of the market. The CAPM beta is estimated using daily returns
from 2017 and 2019 for COVID-19 purpose and from 2006 to 2011 for GFC purpose, and the S&P 500 as the
market index. Similarly, the quarterly abnormal return is the difference between the logarithm of the stock’s gross
quarterly return and the CAPM beta times the logarithm of the market’s gross quarterly return. We then calculate
the volatility of stock returns, both raw and CAPM adjusted. Accounting data for 2019 and 2008 are obtained
from Compustat and are used to construct control variables, namely, Tobin’s q, Size, Cash, Leverage, Return on
equity and Dividend yield. We winsorize all accounting variables at the 1% level in each tail. The data of stock
prices and market value were collected from Thomson Reuters Datastream, and the data of total COVID-19 cases
were collected from World Health Organization through Thomson Reuters Datastream.
Chapter 4:

Model Specification
4.6.1 Difference-in-difference regression
Stock Performanceit = β0 + β1Sharia_treatmenti * PostCOVIDt +β2Sharia_treatmenti *Post fiscalt+ β3 Firm FEi+ eit
(11)
Sharia_treatment is a dummy variable that equals one for firm i if its Sharia-compliant rating is ranked in the top
quartile in 2018, and zero otherwise.
Stock Performanceit = β0 + β1Sharia_treatmenti * Post-GFCt +β2Sharia_treatmenti *Post Bail-outt+β3 Firm FEi+ eit
(12)
Chapter 4:

Description of Variables
Dependent variables
The two dependent variables we study are daily abnormal returns and daily return volatility (measured by
daily price range) of firm i on day t during the first quarter of 2020. The daily abnormal return is estimated
as the difference between the daily logarithm return (i.e., the logarithm of gross return) of a stock and the
CAPM beta times the daily logarithm return of the market. The quarterly abnormal return is the difference
between the logarithm of the stock’s gross quarterly return and the CAPM beta times the logarithm of the
market’s gross quarterly return.
Chapter 4:

Sharia_treatmenti is a dummy variable that is equal to one if its Sharia-Compliant rating is ranked in the top
quartile in 2018, and zero otherwise. Post_COVID variable is a dummy variable which is equals to one from
February 24 to March 31, 2020, and zero before this period. Post_fiscal is also a dummy variable and equals to
one from March 18 to March 31, 2020, and zero before this period. Post-GFC is a dummy variable and equal to
one from 30 July 2007 to 1st September 2008 and for other period it is zero. Post Bail-out equals one from
October 3, 2008 to April 2011, and zero before this period.
Control variables
Chapter 4:

Chapter 5:
Resilience of Sin stocks after COVID-19 stock market crash and financial
crisis 2007-08
Introduction
Several studies have found that sin stocks, defined as shares of public companies engaged in the alcohol,
gambling, and tobacco sectors, generate significantly positive abnormal returns. In spite of this, numerous
investors exclude sin stocks from their portfolio in order to avoid affiliation with the endeavors of these
companies. The decision of these investors to refrain from investing in sin stocks for social, ethical, and
environmental reasons represents a common explanation for why sin stocks are underpriced (Fabozzi et al., 2008;
Hong & Kacperczyk, 2009; Statman & Glushkov, 2009). Studies indicate that investment decisions are influenced
by the observance of social norms, at times superseding the desire for financial gain. It has been found that
individuals observe social norms even those that represent a personal disservice, if they face a damaged reputation
for disobedience of the norm (Akerlof, 1980)

Several studies on the performance of sin stocks provide evidence on the opportunity cost of adhering to an
investment strategy that follows social norms. These studies find that sin stocks exhibit significantly positive
abnormal returns. Fabozzi et al. (2008) examine a global sample of 267 sin stocks across 21 markets for the period
from 1970 to 2007. Their sample includes stocks in the alcohol, tobacco, defense, biotech, gaming, and adult
services sector only if the company’s revenue surpassed 30% of its total revenue. The authors calculate the risk-
adjusted excess return using the CAPM and observe that vice-based stocks outperform other stocks by more than
3% per year. Fabozzi, Ma, and Oliphant analyze several explanations for the outperformance of sin stocks.
First, sin industries tend to have high barriers to entry and exhibit monopolistic returns. Second, due to
controversy around sin, vice-based firms are subject to significant risk of negative publicity, leading to a
discounted valuation. Third, sin stocks face higher subjective risk due to some investors disliking sin stocks as a
consequence of perceiving that vice-based firms do not uphold social norms. Hong and Kacperczyk (2009) present
additional evidence on the apparent disadvantage of following an investment strategy that adheres to moral values
Chapter 5:
crisis 2007-08

Sample Selection and Data Source
Our main data source for Sin stocks is Thomson Reuters data stream which has provided the data of Sin stocks
from 2006 to 2022 because we are considering two major financial crisis for our study. First one is regarding
COVID-19 and the financial mess which COVID-19 has been created globally and the other event is the global
financial crisis (GFC) 2007-8 and the resultant stock market crashes and financial turmoil created by GFC
globally. There is no specific index for Sin stocks, as was the case with ESG stocks and Sharia compliant stocks
so, I pick all tobacco industry companies, alcohol beverage companies and gambling companies, which are
listed in exchange during the period. To identify the sin companies in my sample, I use the Fama French (1997)
classification of stocks based upon their Standard Industrial Classification (SIC) codes into 48 industries. SIC
codes are four-digit numerical codes that categorize the industries that companies belong to depending on their
business activities. Alcoholic Beverages are under the SIC codes 2080-2085 while tobacco products are under
codes 2100-2199.
Chapter 5:
crisis 2007-08

Over the entire period, there are 172 sin stocks distributed as follows: 97 stocks belong to the alcohol sector,
including brewers Heineken and Anheuser-Busch InBev which own well-known brands such as Sol and
Budweiser, as well as distilleries and vintners, like Pernod-Ricard and Diageo, owner of some of the world’s most
famous drink brands, such as Captain Morgan and Smirnoff Vodka; 6 stocks belong to tobacco sector, including
tobacco manufacturers such as British American Tobacco, who owns familiar brands such as Pall Mall and
Northstate; 69 stocks in gambling industry including firms such as The Société des Bains de Mer, which owns
multiple casinos and hotels including Casino de Monte Carlo in Monaco and gambling companies providing
online-betting services such as Entail and Flutter Entertainment. A low number of tobacco stocks is due to the
oligopolistic nature of the tobacco industry - there are only a few major players that dominate the industry - and in
Western European countries these companies either have long established dominance or have acquired the main
domestic producers.
Chapter 5:
crisis 2007-08

Model Specification
5.4.1 Difference-in-difference regression
Stock Performanceit = β0 + β1Sin_treatmenti * PostCOVIDt +β2Sin_treatmenti *Post fiscalt+ β3 Firm FEi+ eit
(19)
Sin_treatment is a dummy variable that equals one for firm i if it’s a sin stock, and zero otherwise.
Stock Performanceit = β0 + β1Sin_treatmenti * Post-GFCt +β2Sin_treatmenti *Post Bail-outt+β3 Firm FEi+ eit
Chapter 5:
crisis 2007-08

Description of Variables
5.5.1 Dependent variables
The two dependent variables we study are daily abnormal returns and daily return volatility (measured
by daily price range) of firm i on day t during the first quarter of 2020. The daily abnormal return is
estimated as the difference between the daily logarithm return (i.e., the logarithm of gross return) of a
stock and the CAPM beta times the daily logarithm return of the market. The quarterly abnormal return
is the difference between the logarithm of the stock’s gross quarterly return and the CAPM beta times
the logarithm of the market’s gross quarterly return.
Chapter 5:
crisis 2007-08

Sin_treatmenti is a dummy variable that is equal to one if it’s a Sin stock, and zero otherwise. Post_COVID
variable is a dummy variable which is equals to one from February 24 to March 31, 2020, and zero before this
period. Post_fiscal is also a dummy variable and equals to one from March 18 to March 31, 2020, and zero
before this period. Post-GFC is a dummy variable and equal to one from 30 July 2007 to 1st September 2008 and
for other period it is zero. Post Bail-out equals one from October 3, 2008 to April 2011, and zero before this
period.
Control variables
Chapter 5:
crisis 2007-08

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