A Comparative Analysis on the Shareholder Value of

Saint and Sin Stocks

A Thesis Proposal
Presented to the
Financial Management Department
De La Salle University - Manila
In Partial Completion of the Requirements for the Degree of
Bachelor of Science in Financial Management

RESFINA K33

Submitted by:

Brito, Adryan Kendall

Chan, Karla Eunice
Ferriols, Christopher Lawrence
Tan, Jernaille Gerlynne

Aug 2016

Group 25

Table of Contents
1. Introduction

1.1. Background of the Study

1.2. Statement of the Problem

1.3. Objectives of the Study

1.4. Statement of Hypothesis

1.5. Significance of the Study

1.6. Scope and Limitations of the Study

1.7. Outline of the Study

2. Review of Related Literature

2.1. Base Journal

2.2. Literature Map

2.3. Research Gap

3. Frameworks

3.1. Theoretical Framework of the Study

3.2. Conceptual Framework of the Study

3.3. Operational Framework of the Study

4. Methodology

4.1. Research and Sampling Design

4.2. Data Description and Collection Method

4.3. Method of Data Analysis

4.4. Methodological Limitation

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 Chapter 1: Introduction

1.1 Background of the Study

As corporate social responsibility is becoming more and more appreciated in

society with works such as sustainable energy, the other side of the spectrum seems to

work in line as well with this principle. Moreover, in finance, stocks that are inherently

unhealthy for people by nature are called “sin stocks”. These stocks have not been

tolerated by society, as well as the government, throughout time with present

regulations such as sin taxes. What this study attempts to look at is the worth of these

stocks in terms of the nature of their activity, as well as the socially responsible

contributions that these listed companies have done.

Seeing that finance and the stock market contributes not only a big part to the

economy, but is also a tremendous influential factor in directing or redirecting society’s

thoughts. Such as in the United States, given so many opportunities in the stock market,

people invest on the continuous development of stocks that are highly valuable, not only

in terms of social responsibility, but in terms of the effects on the government, media,

etc. These influences, especially cultural effects in the ASEAN region is the inspirational

breakthrough of this research. Not only seeing the opportunity of having no research

such as this done in the ASEAN region, but also to further progress the capitalistic

nature of the countries involved that what made the region successful as it is in the first

place.

We understand, fundamentally, that investors explore the revenue generation of

a stock in line with the existing and futuristic projects that the companies that they’re

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investing on has done. But we also put in mind the support that the companies have

done for the well-being of a country's economy and societal landscape. Companies

such as Ayala Land has grown by more than half of its stock price since it first came

out, and innovations by this company has set them in one of the most socially

responsible companies in Asia, according to CSR Asia. This goes along with companies

such as Petron and EDC, which is even considered harmful to the environment because

of its oil mining. But despite all of that, these companies have done innovations that

continually improve their company’s attention to the environment. The recognition that

these companies get are one of the tremendous factors that this study will be

investigating, on whether this element would be ignored or treated as an advantage.

Getting to know a culture of a community or a country can be beneficial for

investments. Seeing that some individuals have a mindset on what they do in their

everyday life such as smoking would affect their take on such stocks. For example, an

Indonesian may have a positive or negative sentiment towards the stock of HM

Sampoerna (Biggest Tobacco Stock in Indonesia) due to the unrestrained culture that

Indonesian have towards this vice. This is what this study would comprise of, an

quantified analytic view in finance that deals with the reaction of people towards the

accepted or unaccepted cultures that their stock market gives them. Through the

dissection of the financials of both sin and saint stocks in a country, we would be able to

deduce from the results the partial intake of citizens towards these investments.

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 Taking place in five ASEAN countries namely: Philippines, Indonesia, Thailand,

Singapore, and Malaysia which comprises of 450 million people and having the biggest

economies in South East Asia, continues to grow rapidly which greatly affects the global

economy. Moreover, these five countries are considerably diversified in terms of culture

and natures of businesses as well. We can see Singapore having dominated by white

collar jobs due to its international image of being a foreign investment haven, having 4

different major ethnicities in its country; Indonesia, a Muslim country, and the

Philippines, a Christian country, on the other hand, having numerous foreign

investments for cheap labor. With these multicultural, as well as multi-financial factors

taken into consideration in this study, the results are truly noteworthy in a globalized

world.

1.2 Statement of the Problem

The legitimacy of sin stocks has always been questioned by society even if it is

somehow good for our economy. But in this study, we do not question the legitimacy of

highly doubted stocks, but rather its thoughts on the investors on how they would be

responding though the money that they invest or divest in these stocks. Also, the “Saint”

stocks, the stocks that are socially responsible, can have many fundamental questions

on whether the investors believe on the righteous projects that these corporations have

been doing, for instance “philanthropic duties”. These foundations are the contentious

elements that the researchers would be answering in this paper by using quantifiable

methods factoring in the premiums and discounts of the stocks of the Saint and Sin

corporations.

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 Shareholder value, which is an incredibly big part of this research, depends on

many parts of the company, and one of these important parts is the management and

projects of a company; seeing that a company contributing to society in a positive way,

such as doing charity or a sustainable project, may not always have positive investor

sentiments. On the other hand, companies that are inherently good, like solar panel

companies, don’t always have the best shareholder value in the market. These factors

will be quantified through the ratios of historical prices in the stock market.

These are the question that will be answered in the research paper:

1) Is the shareholder value of a socially responsible corporation much superior than sin

stocks?

2) Do investors in the ASEAN region pay a premium for socially responsible firms and

pays with a discount for sin stocks?

1.3 Objectives of the Study

The objectives of this paper, among other things is to answer the problem stated

above.

A. For investors to identify if investing in corporations that practice corporate

social responsibility are better investments than the ones that do not.

B. For the company to identify if ASEAN investors are willing to pay premium to

saint stocks and a discount to sin stocks.

1.4 Statement of Hypothesis

The authors of this study seek to determine the impact of casino operations to its

overall value. Therefore, the authors hypothesize the following:

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Hypothesis 1A: There is a strong relationship with Sina and Saint stocks to the

Shareholder Value of a company.

Basing it on the journals regarding altruism, as well as Social Corporate

Responsibility, there was a relationship that triggered a stock company based on the

premium results that they obtained. Whether it is premium or discount, it is consistent

that people with

Hypothesis 2A: The shareholder value performance Socially Responsible Corporation is

much superior than Sin Stocks.

Seeing that the cultural values of the global economy does lean more on

Corporate Social Responsibility and Sustainability, the study aims to provide an

unbiased study with a more objective point of view to perceive investments.

Hypothesis 3A: ASEAN 5 countries have strong correlation between their culture and

stock investments.

Due to the multicultural aspects of the ASEAN region, we see that the cultures

respective to the country will reflect the type of investments that the investors have (ie.

Tobacco culture means high shareholder value to tobacco stocks)

What the researchers expect to sight, is that the correlation between the

established culture of one’s country to its investments is strong. For example, Gudang

Garam (A big company in Indonesia) will perform well in Indonesia, given that the

country does accept, culturally, the habit of smoking. What this entails is that the basis

of investors, may it be rational or irrational, on some of their stocks in their portfolio will

6
 come from their culture or habits. Furthermore, the effect on Behavioral Finance will be

exemplary due to the fact that the psychology of investors can be based on the good or

bad habits that they do. Nevertheless, this study creates better impact to social

corporate responsibility and government regulation through the information provided by

this research.

Little light has been shed on sin stocks due to its controversial relationship to the

perception to the public due to the harmful effects that it does to the human body or

mind. As with any revenue generating organization, identifying key points of profitability

in business operations can help determine a firm’s long-term prospects that are

essential to both investors and credit lenders.

1.5 Significance of the Study

This study would be significant in three fronts:

1) First is to the academe. This comparative research on sin and saint stocks would be the

very first one in Asia, as well as in the ASEAN region to be more specific. Presenting to

the academe that this study is an opportunity in connecting the multicultural aspects of

countries and societies to the investment capacity of stock will be beneficial particularly

to financial studies. Moreover, the academic institutions will be able to see the link of

corporate social responsibility and shareholder value that can be used for further

research since there is not that much studies compared to other CSR studies. Also, to

future researchers, the study will serve as a reference for researchers who want to do

further studies on the topic.

2) Secondly, the study will be beneficial to both investors, as well as to companies that

both practice Corporate Social Responsibility or not. Since this study focuses more on

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 the shareholder value of both sin and saint stocks, investors that are informed with the

results of this study can take advantage of the revenue generating capacity of either

saint and sin stocks depending on the cultural financial preference of a particular

country. Moreover, the study determines if investors are willing to pay a premium for

assets that they consider to be valuable or they will demand for discount for assets they

recognize to be value diminishing. This will serve as a significant reactionary effect on

the companies wherein a factor that affects their stock could depend on the CSR

outcome that they give to society.

3) Lastly, this will have a trickle-down effect on philanthropy in which will significantly affect

socio-civic movements. Organizations such as Gawad Kalinga and Green Peace

acquire their funds from capitalistic organizations that are in the stock market, such as

Petron and Hyundai. The effect on the big companies with this study will then again be

a reactionary effect, but more than that, it will also be a reactionary effect on the

organizations that they are supporting. For example a company does support Gawad

Kalinga and the company turns out to be more applicable to premium due to CSR, the

trickle-down effect on the socio-civic movements will be a positive one, but a negative

one in vice-versa.

1.6 Scope and limitations of the Study

Due to unavailable corporate social responsibility index in the Philippines, the

authors will be using the Federation of the Philippine Industries’ sustainable

development awardees and CSR Asia.

For the data, since it is highly favorable to have a larger data set, the authors will

take ten (10) companies, five (5) from sin stocks and five (5) from saint stocks.

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However, with the limited number of sin stocks in the Philippines, our scope will include

ASEAN countries namely Thailand, Malaysia, Indonesia and Singapore. With the

inclusion of different ASEAN countries, biased study on an isolated economic growth of

the saints and sin stocks will be reduced, but potential outliers of the data for

outperforming companies will significantly affect the results. The ASEAN countries has

a relatively young maturity in sin stocks, namely the gaming industry as well as

companies who have a CSR program in which most began in 2007. The data available

will therefore be limited to a maximum of five (5) years for both saints and sin stocks,

ceteris paribus.

The five ASEAN countries are not chosen because not only that they are the

most relevant in the ASEAN region, but because they create the most impact in the

region in terms of economic benefits. These five countries gave robust growth for the

past five years to the region which made it possible for international investors to see the

opportunity in the global economy. That is why the United States is pursuing their

partnership treaties specifically to South East Asian countries. Recognitions such as

these are signs of high potential growth for the region. What makes it relevant in this

paper is that the countries that do invest in these ASEAN countries are aware of the

opportunities, as well as the risk involved regarding the cultural aspects of this region.

Because we have to understand that in a global economy, relations and comprehension

of one’s culture compared to another either creates better relation or not. That is why

this paper serves as a partial investment guide to the five significant countries.

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 The researchers are limited to the fact that they are undergraduate students that

are finishing a thesis requirement, and not any way professional researchers. Therefore,

funding and other expenses other materials is also a limitation.

1.7 Outline of the Study

In the first half of the research, there will be another three main chapters. In

Chapter 2, the researchers will be discussing the review of related literature wherein

empirical studies of both corporate social responsibility and stocks are available. Also, it

has Saints and Sins impact on stocks. In Chapter 3, the researchers will be discussing

the frameworks which includes the theoretical wherein theories related to the research

are present, the conceptual wherein the theories are related to the paper and the

operational which include the process of doing the paper. In the last chapter, the

researchers will discuss the methods of and further discuss in detail the model that will

be used to answer the hypotheses stated above.

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 Chapter 2: Review of Related Literature

Base Journal

Corporate Social Responsibility programs are becoming increasingly popular

nowadays due to the environmental and social awareness of people and corporations.

Our base journal, the Value of Saints and the Price of Sins seeks to quantify the value

of CSR by modifying the Feltham and Ohlson valuation model. The paper used the CSR

index, MSCI KLD 400 for the corporate responsible firms and used firms in the

“Triumvirate of Sin”- alcohol, tobacco and gaming for the sin stocks.

According to Friedman (1970), the only social responsibility of any business is to

maximize its profits. Corporate social responsibility (CSR) may reduce a company’s

value. In the recent years however, CSR is becoming famous among investors, both

institutional and individual. This could be a result of the increasing awareness of

environmental risk and social risk. Investors are integrating Environmental, Social, and

Governance (ESG) themed investment techniques (Durand, Koh, Limkriangkrai 2014).

The saints that they are talking about in their study are the companies, known as

CSR leaders who are constituent of MSCI KLD Social Index, the benchmark for ethical

performance. The other group they were talking about is the “sinners”. Sinners are

industries collectively known as the “Triumvirate of Sin”. These are stocks with SIC

codes identifying them with alcohol, tobacco, and gaming (Hong & Kacperczyk, 2009).

With their analysis, people are willing to pay an extra of about $5.77 (19.2% above the

share price) and pays a discount of about $3.91 (of 32.1% below the share price). As

CSR becomes widely known across the globe, more companies are accepts the

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concept of having “pro-CSR activities” as way of promoting greater social responsibility.

CSR initiatives do create value (Durand, Koh & Limkriangkrai, 2014).

Importance of Corporate Social Responsibility for Financial and Market

Performance

The Business Case for Corporate Social Responsibility: A Review of Concepts,

Research and Practice contends that a firm that practices CSR will be rewarded by the

market in both economic and financial terms. A narrow view of the paper produces a

direct and clear connection with financial performance by means of immediate cost

savings. On the other hand, the broader view equips the company with competitive

advantage, reduction of risk and reputational benefits.

The informative content of CSR disclosure is appreciated by stock market

participants and is of value. Investors take into consideration the CSR disclosures when

valuing an asset. CSR activities with better disclosure will tend to be a potential tool for

shareholder value. And these results are to encourage businesses to not just

concentrate on profits but in also giving back to society. (Jizi, Nehme & Salama, 2016)

A wide variety of definitions of corporate social responsibility have been

proposed (Margolis & Walsh, 2003). These definitions vary in detail, but many focus on

voluntary firm actions created to improve social or environmental situations (Davis,

1973). In making investment decisions, investors take into consideration some other

factors aside from wealth maximization, in making their investment decisions (Barney &

Mackey, 2007). If investors’ demand for socially responsible investment opportunities is

greater than the supply of these investment opportunities, then such investments can

create value for a firm (Barney & Mackey, 2007).

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 So far, the impact of CSR has been tested empirically by balance sheet data with

several performance indicators. However, these types of analyses miss shareholders

value. In order to understand whether everyone will choose to invest in CSR, the data

should be adjusted to a risk-return perspective using stock prices. They estimated a

GARCH (1,1) and APARCH (1,1) model for each stock. Their findings tend to show that

the risk adjusted returns from socially responsible stocks though they are less risky, are

not significantly lower than control sample stocks. Corporate Social Responsibility and

Stock Market Performance suggests to take into account three more cost factors of

socially responsible investments namely: (the loss of diversification induced by the

restriction of the universe of stocks which can be included in the portfolio, the additional

costs of information required for the SR evaluation and the cost of disinvestment when

exit from SR does not coincide with a change in the expected profitability of the stock

included in the portfolio.

Even though there are no arguments that corporations are required to

performance CSR related activities, there are there are ample amount of debate that

these activities have a bearing on a company. Prior studies have found out that CSR

performance and disclosures. The paper Value-Enhancing Capabilities of CSR: A Brief

Review of Contemporary Literature found out that superior CSR activities might improve

on a employee productivity, present better operating performance, better the product

market, improve the capital market benefits, improve the corporation’s reputation, and

strengthen a firm’s relationship with the society, regulators and other stakeholders by

using its net book value as that is the immediate effect of these programs. The value of

the firm includes long-term managerial decisions on the firm’s operations like sales,

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income and cash flows. All in all, CSR can be a tool for maximizing profits and firms that

practice CSR can possibly increase their shareholder value.

CSR and its performance are divided into four types, which are economic, legal,

ethical, and philanthropic responsibilities, and each type of CSR performance reveals

that each one affects financial performance differently (Daszynska-Zygadlo, Slonski, &

Zawadzki, 2016). Economic responsibility concerns with the generation of profit and

survival, legal responsibility concerns with compliance to the law in addition to the latter

doctrine of responsibility, ethical responsibility concerns the matter of doing the right

thing in combination with economic and legal responsibilities, and philanthropic

responsibilities concerns with making efforts to benefit society in conjunction with the 3

latter responsibilities (Hartman & DesJardins, 2008). The journal hypothesizes that

corporate governance, environmental activities, and social performance have a positive

effect on the Corporate Financial Performance (CFP) in each of Global Industry

Classification System (GICS) sectors with the use of OLS (ordinary least squares)

regression to estimate two models with simplified Tobin’s q and PE ratio as the

dependent variables.

Corporate Governance have a significant positive impact towards Materials,

Financial, and Industrial companies whilst it is the opposite for Staples and Consumer

Discretionary companies (Daszynska-Zygadlo, Slonski, & Zawadzki, 2016).

Environmental activities have negative impact on companies especially towards

Materials and Utilities while a relatively less impact towards Energy, Financial, and

Industrial sectors (Daszynska-Zygadlo, Slonski, & Zawadzki, 2016). Social performance

has a significantly positive impact for Consumers Staples, Financial, Industrial and

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Utilities while negative for Industrial sectors (Daszynska-Zygadlo, Slonski, & Zawadzki,

2016). ROE has a significantly positive impact towards Consumers Discretionary and

Consumers Staples. (Daszynska-Zygadlo, Slonski, & Zawadzki, 2016).

With a significant increase in the number of studies dealing with CSR and

heightened level of interest regarding this topic (Fatemi et al., 2015), a study made in

2015 by Fatemi, Fooladi and Tehranian developed two valuation models. The first

model focuses on the effect of CSR on the cost of capital and the probability distribution

of survival. This model shows that the valuation effect of CSR is dependent entirely on

its influence on the probability of survival. It also provides the conditions under which

CSR can lead to the creation of value. The second model developed presumes a

continuous probability distribution of survival. This valuation model utilizes the concept

of hazard and survival functions. The results of the study support the notions of profit-

maximizing CSR (Gillian et al., 2010) and sustainable value creation model (Fatemi and

Fooladi, 2013). Their results are also in agreement with most of the empirical findings,

which indicates that CSR activities has a positive effect on the value of the firm (Fatemi

et al., 2015).

Impact of Saints

The Effect of CSR on Stock Performance:New Evidence for the USA and Europe

provided empirical findings for the effects of CSR in the western region. They found out

that the monthly stock returns between the years 2003 and 2006 are more vigorous but

it’s neither positive or negative. At that point in time, the US market has rewarded the

corporations that perform environmental and social activities than the European market.

15
To put it in another way, investors that do the usual buy-and-hold technique would have

an increase in portfolio value by merely holding onto these type of stocks.

As for an emerging market, Nigeria has an empirical study of listed

manufacturing companies in Nigeria. The authors attempted to measure the reaction

and the perception of financial markets to the CSR performing companies. However,

their empirical findings show that there is no significant effect or relationship between

CSR and the stock prices when tested in monetary values concerning the environment

and employment.

Impact of Sins

Investor sentiment has an influence on asset prices (Hirshleifer, 2001). Despite

these findings, previous sin stock studies have failed to examine the possible link

between investor sentiment and sin stock returns (Hong & Kacperczyk, 2009). Results

of the study made by Daniel Liston in 2015 showed that both individual and institutional

investor sentiments are factors that affect sin stock prices and returns. The study

indicates a consistent positive simultaneous relationship between sin stock returns and

both types of investor sentiment. (Liston, 2015)

In order to know the flip side of the coin, “sin” or the tobacco, gaming and alcohol

industries were studied to find the effects of social norms in the market. The paper

assumes that there is a societal norm against funding these vice corporations wherein

some institutions purposely pay an amount to abstain from investing in these. Their

findings are in line with their hypothesis as they found out how norm-constrained

institutions such as pension plans abstain from funding these types of stocks. “Sin

stocks also have higher expected returns than otherwise comparable stocks, consistent

16
with them being neglected by norm-constrained investors and facing greater litigation

risk heightened by social norms. Evidence from corporate financing decisions and time

variation in norms for tobacco also suggests that norms affect stock prices and returns.“

(Hong and Kacperczyk, 2007).

2.2 Literature Map

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18
2.3 Research Gap

According to Durand, Koh, and Limkriangkrai (2014), investors are actively

integrating Environmental, Social, and Governance (ESG) themed investment styles.

Empirically, there are conflicting findings of both positive and negative abnormal returns.

Thus, this study would bridge this gap by providing a regional-level analysis, including

Philippines, Thailand, Malaysia, Indonesia, and Singapore.

Furthermore, this study would not only determine the impact of CSR on the share

prices of “saint” stocks, but would also identify if there is a cost for “sin” stocks.

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 Chapter 3: The Frameworks

3.1 Theoretical Framework of the Study

3.1.1 Behavioral Finance

Seeing that human beings, investors to be exact, are not only rational beings at

times but more of emotional beings. In the 21 st century the boom of psychology has

spread throughout different fields of study. One of these is behavioral finance. This field

of study focuses on the decision making process through the emotional, and partly

reasonable, parts of investors. According to Investopedia, a reliable source on where

investors learn basic as well as advance finance, investors are by nature wealth

maximizers. These features the studies wherein the researchers predict the

unpredictable circumstances that greatly affect the market using efficient data.

In this study, sin and saint stocks are considered as avenues of rampant

investing due to its subjective pros and cons of an investor. But using theories and

studies of behavioral finance we will be able to better analyze the investor psychology

on why they invest in these highly situated stocks. A study by Chen and Lai (2013)

consists of the analyzation of expected return through the reclassification of a stock.

This study explains the change of the investors perspective by reclassifying the

Standard Industrial Classification (SIC) code, meaning, there was an explicit code

change in the line of business. Results show that investors saw this as a harm and

benefit due to the significant price changes thereafter. Nuancing this to saint and sin

stocks is not far away. Using behavioral finance, this study would identify if there are

heavy price premiums and discounts on the saint and sin stocks, respectively.

3.1.2 Culture

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 The study will be dealing diversity with its data points as they will be collected

across five countries. Namely; Philippines, Singapore, Malaysia, Indonesia, and

Thailand. Public perception in these five countries vary as their respective cultures

perceive certain vices uniquely or differently compared to others.

For the Philippines, Alcoholism in the Philippines discussed how alcohol is widely

consume, probably because of the Spanish colonizer that brought the culture. It not only

a form of de-stressing, but also a form of bonding with people that is why it is generally

a positive thing. According to the Gambling Industry of the Philippines, the industry is a

great example of raising funds for the state. From the 70s to date, there have been

newly opened casinos in the country. In the near future, the industry is expecting to

expand with casinos being built. The Philippine Statistics Authority said that almost

17.3M Filipinos from the young age of 15 are tobacco/ cigarette smokers. And daily

average shows that Filipino men and women smoke more than 8 times a day.

For Malaysia and Indonesia, a Muslim majority country and a diverse society in

terms of religion and ethnicity. The country’s view on tobacco is mixed, but its

consumption is very rampant despite existing efforts of regulating these vices instead of

banning its practice (VICE NEWS and The Jakarta Post). Gambling and alcohol,

however, is strictly illegal in accordance to Islamic practice and any existing gambling

casinos are not operating legally (Gaming Zion).

For Singapore, the alcohol has moderate restriction the same as Thailand’s

selling ban at certain times. With regards to tobacco, the control measures are strict

(with taxes as well) as there are more and more banned places to smoke which makes

it hard and expensive to smoke.

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 For Thailand, according to Gap Year, even though it is inexpensive to drink

alcohol, there are times of the day and other days like elections and religious holidays

wherein selling of alcohol will be restricted. Even with cigarette packages containing

health warnings, smoking in Thailand continues to be rampant. Gaming is frowned upon

and rather widespread in Thailand and the two legal forms of gambling are horse racing

and lottery (Online Betting).

The table shows a summary of each country's cultural perception of alcohol, tobacco, and

gaming where “✔” indicates a positive perception: regulations exist or limited banning while

“❌”indicates a negative perception:, the vice is illegal/frowned upon.”

Alcohol Tobacco Gaming

Philippines ✔ ✔ ✔

Malaysia ❌ ✔ ❌

Singapore ✔ ❌ ✔

Thailand ❌ ✔ ✔

Indonesia ❌ ✔ ❌

3.1.3 Efficient Market Hypothesis (EMH)

Efficient markets, according to economists, ‘do not allow investors to earn above-

average returns without accepting above-average risks’ (Malkiel, 2003). The idea of

EMH is based on the “random walk theory”, where all subsequent price changes

represent random departures from previous prices (Gupta, 2014). The rationale of the

random walk theory is that if the flow of information is unrestricted, and information is

22
immediately reflected in stock prices, then tomorrow’s price change will reflect only

tomorrow’s news, and will be independent of the price changes today. News is

unpredictable, which means that price changes must also be unpredictable and random.

According to Kendall (1953), ‘stock price fluctuations are independent of each

other and have the same probability distribution’. Stock prices are commonly perceived

as random and unpredictable (Lo & Hasanhodzic, 2010). Malkiel (1973) advocates that

‘the market and stocks could be just as random as flipping a coin’, whereas Shiller

(2000) states that ‘stock prices approximately describe random walks through time: the

price changes are unpredictable since they occur only in response to genuinely new

information, which by the very fact that it is new, is unpredictable’.

According to Fama (1970), efficient markets are markets where ‘there are large

numbers of rational profit maximizers actively competing with each trying to predict

future market values of individual securities and where important current information is

almost freely available to all participants’. Both individual and stocks and the aggregate

stock market are efficient when they fully reflect available information, and can

incorporate it in current stock prices (Malkiel, 2003).

There are three different forms of efficiency, which are strong form, semi-strong

form, and weak form of efficient market hypothesis (Fama, 1970). Strong form is where

information has an impact on stock pricing, and therefore, does not enable investors to

gain a competitive advantage in investing processes. Semi-strong form is where public

financial information such as announcements of listed companies, balanced sheets,

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etc., are fully reflected in stock prices. Weak form is where all historical stock prices are

incorporated in current prices; therefore, they cannot be used for forecasting.

3.1.4 The Disposition Effect

Individual investors strongly prefer selling stocks that have increased in value

since bought (winners) compared to stocks that have decreased in value since bought

(losers) (Barber & Odean, 2011). Shefrin and Statman (1985) labeled this behavior the

“disposition effect” - investors sell winners and hold losers. The disposition effect is a

remarkably consistent and robust phenomenon.

3.1.5 The Agency Theory

Agency relationship exists when one party, called the agent, makes decisions

and acts on behalf of another, called the principal (Ingram, 2016). The agency theory

seeks to summarize and solve problems arising from the relationship between a

principal and an agent. In financial management, agency relationships are common due

to the nature of the industry. An agency relationship exists by default when one person

manages another person’s financial affairs.

Financial management is all about risk, and each investor has different risk

appetite. In an agency relationship, chances are high that principals and agents have

different risk tolerances, which can lead to misunderstandings and a failure to agree on

investing decisions. Even when agents act toward principals’ goals, their means of

doing so may conflict with principals’ risk tolerances.

3.1.6 Legitimacy Theory

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 Legitimacy theory proposes that organisations continually aim to ensure that they

operate within the limits and norms of their respective societies (Guthrie, 2006). Under

legitimacy theory, a company would voluntarily report on activities if management

perceived that those activities were expected by the communities in which it operates

(Deegan 2002; Deegan, Rankin and Voght 2000).

Legitimacy theory is dependent on the idea that there is a “social contract”

between a company and the society in which it operates (Deegan, 2000). The social

contract is used to represent the myriad expectations society has about how an

organisation should conduct its operations (Deegan 2000; Mathew 1993). Specifically, it

is considered that an organisation’s survival will be threatened if society perceives that

the organisation has breached its social contract (Deegan 2002). Where society is not

satisfied that the organisation is operating in a legitimate manner, society will revoke the

organisation’s ‘contract’ to continue its operations (Deegan and Rankin 1997).

3.2 Conceptual Framework of the Study

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 The conceptual framework of the study is based from existing theories related to

the topic. The first two theories we would be working with are Legitimacy Theory and

Agency Theory. In the study, legitimacy theory and agency theory would help explain

why investors invest in companies engaged in CSR programs. Legitimacy theory is

dependent on the idea that there is a “social contract” between a company and the

society in which it operates. EMH and Disposition Effect Theory would help explain how

investors react on the information given to them. In the study, EMH is used to evaluate

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how investors react when their shareholder value is maximized or minimized. Lastly,

using behavioral finance, this study would identify if there are heavy price premiums and

discounts on the saint and sin stocks, respectively.

3.3 Operational Framework of the Study

In this study, what is most relevant is the classification of sin and saint

companies. This is to determine the effects to the stock prices in which social

responsibility is concerned. Furthermore, in connection with the latter, the countries

involved in this study namely Indonesia, Malaysia, Singapore, Thailand, and Philippines.

With these countries, a total of 50 companies will be obtained, 10 from every country,

and half of which will be classified as sins and the other will be the saints. With the

determination and classification of the sin and saint data, acquiring the relevant financial

statements for the listed stock companies will be the following step. The information

from this activity shall be obtained from the respective stock market websites of each

country, seeing that the financials of these listed companies are publicly available.

Considering that the data points that would be involved from the financials have

been collected, the computation for the independent variables (if applicable) will be

performed. This process is relevant for the computation of the dependent variable,

Market Value of Equity, which will be used as for the final formulation of the premiums

and discounts. Moreover, the premiums and discounts will be acknowledged in the end

as a basis of determining the overall effects such as the comparison of cultural

investments of respective countries, and the relevance of socio-cultural involvement of

citizens in a domestic economy.

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 This paper seeks to quantify the value of Corporate Social Responsibility in

relation to its effect to the share price of the company. Recent papers have showed

conflicting results of both positive and negative abnormal returns, and this study aims to

check whether the same results hold for the years 2011 to 2015. Moreover, the paper

focuses on companies regarded as Saints and Sinners which comprises of publicly

listed companies. By using the Feltham and Ohlson valuation model and quantile

regressions, it would estimate the “Saint premiums” and “Sinner discounts”.

With certain theories such as Environmental, Social and Governance (ESG) themed

investment style, which is an indicator that CSR practices are becoming increasingly

popular among institutional and individual investors, to support the study. Using

regression analysis to determine the positive significant relationship that exists between

corporate social responsibility and firm’s share price. By obtaining the data from 50

companies listed in FPI (Federation of Philippine Industries), PSE (Philippine Stock

Exchange), CSR Asia and Stock Indices of countries such as, Thailand, Malaysia,

Singapore, and Indonesia, the researchers acquire the needed values spanning for 5

years from 2011-2015. Moreover, the study can be used as additional data for other

related studies that might be conducted in the future.

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3.3.1 A priori Expectation

CSR creates shareholder, while practices contrary to social norms destroy value.

Investors pay a premium for Saints, and investors require a discount to buy Sinners.

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 Chapter 4: Methodology

4.1 Research and Sampling Design

This study was done in order to find out the relationship of corporate social

responsibility to investor sentiments whether or not they pay a higher price to those

company that does CSR rampantly and if they ask for a discount to those that are

inherently a sin to society. In able for this study to flourish, the researchers, have

obtained data from stock markets from different parts of Asia, together with their

respective CSR rankings (if applicable). The sin stocks are not ranked in any order but

is only viewed from a standpoint that their line of business is inherently considered as a

sin.

The researchers have chosen a various types of methods in order to compare

and contrast the possibilities in the relationship of these stocks through their prices.

Quantitative analysis that will determine the CSR returns are done. Also, relevant

literature was obtained and done as a basis of these calculations for the strengthening

30
of the valuation methods of valuation studies, such as the Fathom-Ohlson valuation

method.

In this chapter, we will see how it is justified to use these research methods, such

as quantile regression, identifying the analytics that will be concluded later on at the

later part of the study. To be specific, the research will cover up on the stock prices and

various ratios that would support in obtaining the dependent variable which is the

market value of a Saint or Sin stock.

4.2 Data Description and Collection Method

In order for this study to be accomplished, the primary use of computation and

analysis will come from a quantitative kind of analysis. This method of research will be

based, not on subjective matters and opinions such as surveys, but as more of technical

analysis. This would be an analysis of stock prices and their respective ratios through

the means of regression to amplify the intended results through justifiable calculations

wherein the researchers tend to get the intended conclusions. This form of method is

relevant for two reasons. First, if we solely base it on a qualitative method, which is

partially done in this paper, it does not truly reflect the stock market which mostly

consists of technicalities through stock prices. Second, this study intends to form a more

reasonable basis of premium and discount of stock prices, in which quantifying is more

justified.

The data that is obtained comes from public sources, such as the stock markets

of respective countries used in this study. The composition of the data will also be on a

yearly basis To nuisance this research, there are particular Corporate Social

Responsibility rankings that the researchers are using as a basis of considering them as

31
a Saint, for the reason being that these ranking bodies are deemed legitimate by one’s

country. Examples are the Federation of Philippine Industries, wherein they award and

rank every year the most sustainable and socially responsible corporation in the

country. The relevance of this data gathering method is to greatly differentiate those

socially responsible corporations from the sin corporations.

In cases wherein the data gathered has had a conflict or redundancy; for

example, San Miguel Corporation which is considered as a sin stock due but at the

same time can be considered as a socially responsible corporation, we take into

consideration the inherent purpose of business affairs that these company has done.

Societal impact, when weighed at the very least, these sin companies will put their

products first.

The definition of the main variables will be revolving around the necessary

information that will be needed to be inputted in the equation and will be expanded upon

respectively with regards to sub-variables that will be needed to compute for the main

variables. The main variables are the 1) market value of the firm’s equity (MVE), 2) book

value of equity (BVE), and 3) abnormal operating earnings (AOE). The MVE is the

market price per share or simply the “share price” that is being traded in the market.

BVE is the current book value of the equity and is computed as the summation of net

operating assets (NOA) and net financial assets (NFA) divided by outstanding shares of

the company. NOA is computed with the total assets subtracted to cash and other cash

equivalents. NFA is computed with the total liabilities subtracted to long term and short

term debts. AOE is a valuation model which determines the residual income generated

by the company as a result of management decision and/or governance. It is computed

32
as the weighted average cost of capital (WACC) multiplied to the lagged net operating

assets divided to the outstanding shares of the company. WACC is the rate in which to

determine the cost of capital for a company Lagged net operating assets is simply the

NOA the term before, and in the case of this study the NOA of the year before.

There are two main sources of data that will be acquired in order for the model to

be : First, actual prices from the balance sheets of the saint and sinner companies in

order to determine our independent variables; Second, market prices from the country’s

stock exchange for the dependent variable.

4.3 Method of Data Analysis

Numerous studies that examine the relationship of corporate social responsibility

and financial performances mainly focuses on the accounting-based performances in

the model in order to quantify and valuate CSR in market value of a firm’s equity. Due to

its unbiased and conservative nature of the model that undervalues equity and book

value of assets, the based journal have modified the model in order to account for the

adjustments in conservatism proportional to a company’s operating assets. With this

modification, the Feltham-Ohlson’s model is able to produce a closed-form valuation

function in a complete framework predictions that deals with value and accounting data

(Durand, Koh & Limkriangkrai, 2014).

This quantitative research will focus on the usage of the Feltham and Ohlson

Valuation Model where the assets and the abnormal earnings it generates are variables

contributing to the function of the company’s value for regression analysis. The basic

equation of the Feltham and Ohlson model is where the variables are represented by

the following (Durand, Koh & Limkriangkrai, 2014):

33
EQ. 1 Feltham and Ohlson Valuation Model

MVEit = BVEit +1 AOEit

● MVEit is the market value of the firm's equity or current share price of company i

at time t

● BVEit is the current book value of equity or the summation of net operating

assets (NOA) and net financial assets (NFA) divided by the number of

outstanding shares of company i at time t. The equation for BVE is

NOA + NFA
: BVE=
Outstanding Shares

(Total Assets−Cash)+(Total Liabilities−Long Term Debt−Short term Debt )

BVE=
Outstanding Shares

● AOEit is the abnormal operating earnings or firm's weighted average cost of

capital (WACC) multiplied by lagged net operating assets divided by the number

of outstanding shares of company i at time t; The equation for AOE is

WACC∗Lagged NOA
AOE=
Outstanding Shares

and

● 1 is a firm specific coefficient

The journal expands the Feltham and Ohlson Valuation Model in order to capture

the real value of a firm with 2 additional equations. Thus, the expansion of the original

regression model into a quantile regression was necessary. Quantile Regression is a

variation of the Ordinary Least Squares (OLS) where in the Quantile Regression models

the relationship between multiple independent variables and conditional quantiles of the

dependent variable in a model (Chen, C.). The expanded equations are as follows:

34
EQ. 2 Inclusion of Dummy Variables

MVEit = γ + β1BVEit + β2AOEit + βSaintt SAINTDUMit + βSin SINDUMit + βyear Year +

βindustry Industryit + errorit

The variables γ is a coefficient of the equation while β is a beta coefficient to its

respective variable. The dummy variables are represented by SAINTDUM and SINDUM

where it takes the value or either a 1 or 0, SAINTDUM takes the value of 1 if the stock is

a Saint and zero otherwise, Likewise, the same conditions apply to SINDUM (Durand,

Koh & Limkriangkrai, 2014). The inclusion of the dummy variables is crucial since our

study deals with polar opposites in generating revenue and the application quantile

regression allows the study to analyze data where potential extremes of both saint and

sin stock values may be present.

4.4 Methodological Limitation

The researchers will not be able to fully determine the variables necessary in

order to create an accurate model depicting a company’s value given the knowledge we

possess and the data that the researchers will be able to acquire. The researchers will

attempt to use theories in finance, economics, and statistics in order to explain a

phenomenon or gap in the research.

Data Source

35
 Data sources will come from both quantitative and qualitative forms (which may

be subjected to a certain degree of bias). It was earlier stated that the data that will be

obtained for this study comes from stock markets and financial statements of the

respective countries included in the study.

Classification

Additionally, determination of whether the data is a Saint or Sin stocks will fall on

a CSR index/ranking and nature of business. The CSR index/ranking will be based on

the Federation of Philippine Industries (FPI) and FTSE Russell. Statistical software that

will be used to generate the results will be STATA, gretl, SAS, and/or R.

Feltham-Ohlson model Limitation

There are inherent limitations towards any form equation/model and there are

imperfections present in the Feltham-Ohlson model.

“This skepticism is particularly well founded in light of evidence in the few

studies that do test the model with scale-free data, which find that the model

does not perform better than existing (simpler) models.” - (Lo & Lys, February

2000)

The model is created with the notion of a perfect capital market scenario and is

not meant to entirely describe real world market movements.The model could also be

improved by incorporating additional variables that correctly represents could be

enhanced to incorporate the effects of taxes, bankruptcy costs, agency costs,

asymmetric information, and so on (Lo & Lys, February 2000).

36
Imputation

Whenever a data point is missing or unavailable, the research will be using the

process of imputation to replace the missing data with a substituted value using

regression. The researchers will be using regression in order to resemble forecasting

the future value and to reduce an inaccurate prediction of the missing value. The

general regression analysis equation is:

Y = α + βX

● “Y” is the dependent variable

● “α” is the intercept of line and is computed as:

α = y−B∗x

where y∧xare the average values of respective data groups that is being observed

● “Β” is the slope of line where the equation is:

Σ [(xi−x)( y i− y )]
B=
Σ [(x i−x)2 ]

where xi is the data information at time i and yi is the data information at time i

● “X” is the dependent variable

37
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