Social Norms and Cost of Equity: Empirical Examination in Indonesia

This paper provides evidence of the effect of social norms, as measured by sin stock status, on the cost of equity capital. We consider Indonesian publicly traded sin stocks that produce alcohol and tobacco. While previous studies focused on whether sin and saint stocks have different financing preferences, we examine how these companies are charged differently in terms of their cost of equity capital. Our research sample consists of companies listed on the Indonesian Stock Exchange from 2016 to 2020. Regression analysis proves that sin stock status has a significant influence on equity capital costs. There is an extra premium for sin stocks, as they are perceived to be riskier by investors in the market. Our results make a significant
contribution to the emerging literature on social norm-based investing, demonstrating a major impact on both corporate finance and investment management decisions. The study’s sample is restricted to publicly traded companies in Indonesia from 2016 to 2020, potentially limiting the generalizability of its findings to other countries or periods. Further research could broaden the scope of analysis and delve deeper into the factors that influence the cost of equity for sin stocks in various contexts.