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Are sin stocks paying the price for accounting sins?

Publication ,  Journal Article
Kim, I; Venkatachalam, M
Published in: Journal of Accounting, Auditing and Finance
April 1, 2011

Recent empirical evidence suggests that sin stocks-publicly traded stocks in the gaming, tobacco, alcohol, and adult entertainment industries-are neglected by stock market participants because of social norms, regulatory scrutiny, and litigation risk. Consequently, these firms experience low institutional ownership, low analyst following, and higher expected returns. This paper examines whether higher information risk in the form of poor financial reporting quality offers an explanation for the higher expected returns of sin firms. Inconsistent with this explanation, we find that the financial reporting quality of sin firms is superior relative to a variety of control groups along two dimensions: predictability of earnings for future cash flows and timely loss recognition. These results imply that, despite superior returns and higher financial reporting quality, investors are willing to neglect sin stocks and instead bear a financial cost in order to comply with societal norms and reflect non-financial tastes in their portfolio.

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Published In

Journal of Accounting, Auditing and Finance

DOI

EISSN

2160-4061

ISSN

0148-558X

Publication Date

April 1, 2011

Volume

26

Issue

2

Start / End Page

415 / 442

Related Subject Headings

  • Accounting
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1502 Banking, Finance and Investment
  • 1501 Accounting, Auditing and Accountability
 

Citation

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Kim, I., & Venkatachalam, M. (2011). Are sin stocks paying the price for accounting sins? Journal of Accounting, Auditing and Finance, 26(2), 415–442. https://doi.org/10.1177/0148558X11401222
Kim, I., and M. Venkatachalam. “Are sin stocks paying the price for accounting sins?Journal of Accounting, Auditing and Finance 26, no. 2 (April 1, 2011): 415–42. https://doi.org/10.1177/0148558X11401222.
Kim I, Venkatachalam M. Are sin stocks paying the price for accounting sins? Journal of Accounting, Auditing and Finance. 2011 Apr 1;26(2):415–42.
Kim, I., and M. Venkatachalam. “Are sin stocks paying the price for accounting sins?Journal of Accounting, Auditing and Finance, vol. 26, no. 2, Apr. 2011, pp. 415–42. Scopus, doi:10.1177/0148558X11401222.
Kim I, Venkatachalam M. Are sin stocks paying the price for accounting sins? Journal of Accounting, Auditing and Finance. 2011 Apr 1;26(2):415–442.
Journal cover image

Published In

Journal of Accounting, Auditing and Finance

DOI

EISSN

2160-4061

ISSN

0148-558X

Publication Date

April 1, 2011

Volume

26

Issue

2

Start / End Page

415 / 442

Related Subject Headings

  • Accounting
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1502 Banking, Finance and Investment
  • 1501 Accounting, Auditing and Accountability