Forgiven by the market: an empirical analysis on the value effects of sin firm acquisitions

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While the financial economic literature on good CSR behavior seems to be ever-growing, this study focusses on the opposite side for insights on the market perception of unethical investing. Perceived as unethical are so-called ‘sin firms’, which operate in the alcohol, tobacco, weapons and gambling industries. Sin firms have recently been the center of discussion on the question whether or not they could provide investors abnormal returns on their stock portfolios. By analyzing acquirer cumulative abnormal returns for acquisitions that involve sin firm targets, this study shows whether such potential abnormal returns are present in M&A deals. Prior research on this topic is slim and has only focused on short-term returns for acquirers that are not sin firms. It is found that when also looking at the long-term, there seems to be a reversing effect from negative short-term returns to positive long-term returns of sin acquisitions. This supports behavioral economic evidence on the existence of a horn effect and a reversal effect. Additionally, results show no evidence of differences in the returns of sin acquisitions between acquirers that are sin versus those that are not.
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