Sin stocks in European countries: The influence of wealth and familiarity bias on investment choices


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This study examines the relationship between the wealth of European societies and their investment decisions in «sinful» industries, including tobacco, alcohol, and gambling. The study aims to challenge the widely held belief that wealthier countries are more socially responsible in their investment choices and to investigate the impact of familiarity bias on investment decisions in these industries. An experimental research design with panel data compares the returns from a portfolio of sin stocks from Northern Europe with a portfolio of sin stocks from Southern and Eastern Europe. The study utilises multiple models, including the CAPM single-factor, the Fama-French three-factor, and the Fama-French five-factor, to measure the risk-adjusted returns of sin stocks across various European countries. Findings reveal that sin stocks from wealthier countries tend to have higher risk-adjusted returns compared to those from less wealthy countries. Sin stocks have a significant relation with the market, but their volatility is consistently lower. Countries that drink more alcohol are more willing to invest in alcohol stocks than countries that drink less, as these stocks outperform the market during economic downturns. Sin stocks impact financial performance, investor behaviour, social responsibility, market efficiency, and regulations. The study uncovers the influence of familiarity bias, indicating that investors from countries more accustomed to «sinful» activities are less reluctant to invest in such industries than countries with lower familiarity. This finding highlights the importance of cultural and social factors in shaping investment decisions and challenges traditional concepts of market efficiency.

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    • Table 1. Descriptive statistics of the dependent variables
    • Table 2. Descriptive statistics of the explanatory variables
    • Table 3. Regression output for North Europe and South and East Europe portfolios
    • Table 4. Regression output for High Alcohol and Low Alcohol Portfolios
    • Table 5. Regression output for High Gambling and Low Gambling Portfolios
    • Investigation
      Mohammed Hamdan
    • Resources
      Mohammed Hamdan, Pedro Fernandez Calavia
    • Supervision
      Mohammed Hamdan
    • Validation
      Mohammed Hamdan, Nasir Aminu
    • Writing – original draft
      Mohammed Hamdan, Pedro Fernandez Calavia
    • Conceptualization
      Pedro Fernandez Calavia, Nasir Aminu
    • Formal Analysis
      Pedro Fernandez Calavia, Nasir Aminu
    • Methodology
      Pedro Fernandez Calavia, Nasir Aminu
    • Software
      Pedro Fernandez Calavia
    • Visualization
      Nasir Aminu
    • Writing – review & editing
      Nasir Aminu