Analyzed and presented a study on how the concept of "Sin" affects the valuation of firms in the wine, spirits, beer, tobacco, gambling and weapons industries around the world.

1. International Variation in Sin Stocks
and its Effects on Equity Valuation
Larry Fauver and Michael B. McDonald IV
Joshua Dopkowski
Gustavo Martinez
Sonoma State University, EMBA C5

2. Overview
• Introduction
• Terms
• Strategy
• Hypothesis
• Conclusion

3. Introduction
• Do social attitudes towards sin stocks have an impact on
the equity values of firms producing these goods?
• Past work has generally examined sin stocks in only one
nation at a time and assumes that all cultures regard sin
stocks similarly; a uniform definition of sin.
• This assumption is likely wrong given cultural differences.
• The article develops an empirical method to distinguish the
attitudes of different nations and then apply this method to
show how the differences in social attitudes manifest
through the valuation firms.

4. Terms
• G20 Nations – 20 nations selected by their significance
in the world economy.
• World Values Survey (WVS) – started 1981, biennial
survey of thousands of citizens, 97 nations, hundreds
of questions (measure morality)
• Sin Stock – Tobacco, Alcohol, Gambling and Weapons
• Arbitrage - the practice of taking advantage of a price
difference between two or more markets

5. Terms
• American Depositary Receipt (ADR) – A negotiable
certificate issued by a U.S. bank representing a
specified number of shares in a foreign stock that is
traded on a U.S. exchange.
• Sin Stock Dummy – stock of a company either directly
involved or associated with activities considered to be
unethical or immoral.
• Tobins’Q (Q Ratio) – the combined market value of all
the companies in the stock market should be about
equal to their replacement costs.
Q Ratio= Total Market Value of Firm
Total Asset Value

6. Strategy
• Classification of Sin and Non-Sin nations.
– Use of WVS in G20 to determine social views of
Sin in all 20 nations.
– Composite Measure: Legal, Social, Consumption
• Hypotheses & Data
– Three Hypotheses
– Tobin’s Q
• Results & Conclusion

7. Number of firms and potential sin firms in G20 nations.

8. 120
100
80
60
40
20
0
United
States
United
Kingdom
Russia
Japan
France Germany Canada Australia
China

9. Hypothesis 1
• Sin firms will have lower valuations in sin
countries than in non-sin countries.
– Result: a sin stock in a nation where these firms
are shunned have a Tobin’s Q that is .067 lower
than comparable non Sin Firms.
– This leads to a statistically and economically
significant 7.8% decrease in firm valuation.

10. Hypothesis 2
• Lower valuation in sin stock nations lead to
higher equity returns in sin vs. non-sin nations.
– Result: when all the industries are combined using sin
stock measure based on social norms, there is a
significant aversion to these stocks that leads them to
have excess returns.
– This supports hypothesis 2 and the view that
differences in returns between sin stocks in sin nations
and non-sin nations are significant and are likely
driven by social norms between these types of
countries.

11. Hypothesis 3
• Differences in equity returns are either
arbitraged away over time or persist due to
restrictions with international capital flows.
– Results: The coefficient on the ADR is larger than
the coefficient on the industry variable suggesting
that the benefits of having an ADR on average
fully offsets the negative impact of being a sin
stock in a country where social norms cause the
stock to be poorly regarded.

12. Cross-Listing

13. Conclusion
It Costs Money To Believe In Sin
• In nations where sin stocks are considered sinful, the
average sin firm’s Tobin’s Q is 8% lower than that of the
average non sin firm.
• In nations where sin stock are not considered
sinful, the difference in Tobin’s Q between sin and nonsin firms is insignificant.
• It is important to take into account the differences in
social and cultural traits, and how those differences
affect investment distortions in certain industries.

14. International Variation in Sin Stocks
and its Effects on Equity Valuation
Larry Fauver and Michael B. McDonald IV
Gustavo Martinez
Joshua Dopkowski