Open Journal Systems

Do Unethical Stocks Win in Developing Country? Evidence From Indonesia

Farah Amalia, Ari Kristin Prasetyaningrum, Nur Aini Fitriya Ardiani Aniqoh

Abstract

Ethical investing in various countries is increasingly popular following the number of ethical investors. However, the performance of ethical investments in many developed countries is lower than the performance of the opposite category, unethical stock, or researchers called it as sin stock. This study examines whether the performance of sin stocks in Indonesia is as good as the performance of sin stocks in developed countries considering the very different cultures and religions. This study comprehensively measures the performance of all sin stocks and ethical stocks using the risk-adjusted return approach, the Sharpe and Treynor ratios. To sharpen the analysis, this study also measures the efficiency of all types of stocks using the data envelopment analysis method. The results show that the performance of the sin stock portfolio in Indonesia is different from the facts in developed countries. Sin stocks in Indonesia had the worst performance during 2013-2022 compared to ethical stocks. Furthermore, in terms of efficiency, the SRI-Kehati Index has the highest score compared to all indices. This research contributes to provide theoretical and practical insights about the comparison of the performance of sin stocks and their counterparts in Indonesia which is different from sin stocks in developed countries. The originality of the research includes the creation of a sin stock portfolio and the use of constraint stocks as a proxy for ethical stocks.

Keywords

Sin stock; socially responsible investment; environmental social governance; Islamic stock

References

Akerlof, G. A. (1980). A theory of social custom, of which unemployment may be one consequence. The quarterly journal of economics, 94(4), 749-775.

Amory, M. (2016). Do different cultural values affect the excess return of sin stocks? MaRBLe, 2.

Azmi, W., Mohamad, S., & Shah, M. E. (2020). Ethical investments and financial performance: An international evidence. Pacific-Basin Finance Journal, 62, 101147.

Badoi, A. C. (2016). RISK RETURN EFFICIENCY: AData ENVELOPMENT ANALYSIS ON THE CROSS SECTION OF STOCK RETURNS.

Berry, R. H., & Yeung, F. (2013). Are investors willing to sacrifice cash for morality? Journal of Business Ethics, 117(3), 477-492.

Boumda, B., Duxbury, D., Ortiz, C., & Vicente, L. (2021). Do Socially Responsible Investment Funds Sell Losses and Ride Gains? The Disposition Effect in SRI Funds. Sustainability, 13(15), 8142.

Brimble, M., Vyvyan, V., & Ng, C. (2013). Belief and investing: Preferences and attitudes of the faithful. Australasian Accounting, Business and Finance Journal, 7(1), 23-41.

Castro, E., Hassan, M. K., Rubio, J. F., & Halim, Z. A. (2020). Relative performance of religious and ethical investment funds. Journal of Islamic Accounting and Business Research.

Chew, S. H., & Li, K. K. (2017). Sin Stock Aversion in the Financial Market: An Experimental Investigation. Available at SSRN 2792301.

Daugaard, D. (2020). Emerging new themes in environmental, social and governance investing: a systematic literature review. Accounting & Finance, 60(2), 1501-1530.

De Jong, E., & Semenov, R. (2006). Cultural determinants of ownership concentration across countries. International Journal of Business Governance and Ethics, 2(1-2), 145-165.

Derwall, J., Koedijk, K., & Ter Horst, J. (2011). A tale of values-driven and profit-seeking social investors. Journal of Banking & Finance, 35(8), 2137-2147.

Durand, R. B., Koh, S., & Limkriangkrai, M. (2013). Saints versus Sinners. Does morality matter? Journal of International Financial Markets, Institutions and Money, 24, 166-183.

EUROSIF. (2014). European SRI Study. Retrieved from https://www.eurosif.org/wp-content/uploads/2022/03/Eurosif-SRI-Study-2014.pdf

Fabozzi, F. J., Ma, K., & Oliphant, B. J. (2008). Sin stock returns. The Journal of Portfolio Management, 35(1), 82-94.

Faturohman, T., Widjaya, K. A., & Afgani, K. F. (2021). Sin Stock Proportion and Investment Manager Education Background in Indonesian Equity Funds. In Environmental, Social, and Governance Perspectives on Economic Development in Asia: Emerald Publishing Limited.

Fauver, L., & McDonald IV, M. B. (2014). International variation in sin stocks and its effects on equity valuation. Journal of corporate finance, 25, 173-187.

Gonçalves, T., Pimentel, D., & Gaio, C. (2021). Risk and performance of European green and conventional funds. Sustainability, 13(8), 4226.

Habibi, A., Normasyhuri, K., & Anggraeni, E. (2022). The Indonesian Sharia Capital Market in Shock Covid-19: Global Market Interaction. EQUILIBRIUM: Jurnal Ekonomi Syariah, 10(2).

Heinkel, R., Kraus, A., & Zechner, J. (2001). The effect of green investment on corporate behavior. Journal of financial and quantitative analysis, 36(4), 431-449.

Hofstede, G. (2016). Culture's consequences: Comparing values, behaviors, institutions, and organizations across nations. Collegiate Aviation Review, 34(2), 108.

Hong, H., & Kacperczyk, M. (2009). The price of sin: The effects of social norms on markets. Journal of financial economics, 93(1), 15-36.

Kim, K.-T., Lee, D. J., Park, S.-J., Zhang, Y., & Sultanov, A. (2015). Measuring the efficiency of the investment for renewable energy in Korea using data envelopment analysis. Renewable and Sustainable Energy Reviews, 47, 694-702.

Lakaba, A., & Robiyanto, R. (2018). Evaluasi kinerja saham bertanggungjawab sosial (Studi pada saham-saham yang masuk perhitungan indeks SRI-Kehati). Jurnal Organisasi Dan Manajemen, 14(2), 95-107.

Liston, D. P., & Soydemir, G. (2010). Faith‐based and sin portfolios: An empirical inquiry into norm‐neglect vs norm‐conforming investor behavior. Managerial Finance.

Lobe, S., & Walkshäusl, C. (2016). Vice versus virtue investing around the world. Review of Managerial Science, 10(2), 303-344.

Mahastanti, L. A., Asri, M., Purwanto, B. M., & Junarsin, E. (2021). Sharia-based Stocks: Do Muslim Investors Prefer Metaphysical or Materialistic Returns? The Journal of Asian Finance, Economics and Business, 8(1), 609-621.

Marune, A. E. M. S., & Tanadi, I. S. (2021). Polemics of the Bill on the Alcoholic Beverages’ Prohibition in Indonesia. Interdisciplinary Social Studies, 1(3), 172-182.

Modesto Morales, T. M. K. (2013). CAN SMOKING & DRINKING BE GOOD FOR YOU?

THE “SIN STOCK” INVESTMENT PREMIUM. Mustang Journal of Business & Ethics, 4, 47.

Nath, S. (2021). The business of virtue: Evidence from socially responsible investing in financial markets. Journal of Business Ethics, 169(1), 181-199.

Nurasiah, I., Nugraha, N., Disman, D., & Yuniarti, R. D. (2020). Sin Stocks in Various Litigation Risk: A Case Study in 14 Countries.

Pástor, Ľ., Stambaugh, R. F., & Taylor, L. A. (2021). Sustainable investing in equilibrium. Journal of financial economics, 142(2), 550-571.

Pompian, M. M., & Wood, A. S. (2006). Behavioral Finance and Wealth Management: How to Build Optimal Portfolios for Private Clients. New Jersey: John Wiley and Sons, Inc.

Qoyum, A., Al Hashfi, R. U., Zusryn, A. S., Kusuma, H., & Qizam, I. (2021). Does an Islamic-SRI portfolio really matter? Empirical application of valuation models in Indonesia. Borsa Istanbul Review, 21(2), 105-124.

Renneboog, L., Ter Horst, J., & Zhang, C. (2007). Socially responsible investments: Methodology, risk exposure and performance.

Ricciardi, V., & Simon, H. K. (2000). What is behavioral finance? Business, Education & Technology Journal, 2(2), 1-9.

Riedl, A., & Smeets, P. (2017). Why do investors hold socially responsible mutual funds? The Journal of Finance, 72(6), 2505-2550.

Robiyanto, R. (2018). Performance evaluation of stock price indexes in the Indonesia Stock Exchange. International Research Journal of Business Studies, 10(3), 173-182.

Rubio, J., Maroney, N., & Hassan, M. K. (2018). Can efficiency of returns be considered as a pricing factor? Computational Economics, 52(1), 25-54.

Salaber, J. (2013). Religion and returns in Europe. European Journal of Political Economy, 32, 149-160.

Saraswati, N. (2019). Culture and International Law: CRC Press.

Statman, M. (2004). What do investors want? The Journal of Portfolio Management, 30(5), 153-161.

Tala, M., & Odden, M. Ø. (2020). Does ESG rating affect sin stock performance? Evidence from sin stocks in US markets. Handelshøyskolen BI,

USSIF. (2018). Report on US Sustainable, Responsible and Impact Investing Trends. Retrieved from https://www.ussif.org/files/Trends

www.idx.co.id. indonesia stock exchange.

Zerbib, O. D. (2020). A sustainable capital asset pricing model (S-CAPM): Evidence from green investing and sin stock exclusion. Paper presented at the Proceedings of Paris December 2020 Finance Meeting EUROFIDAI-ESSEC.

Full Text: PDF

DOI: 10.21043/equilibrium.v11i1.19366