ABSTRACT
Purpose – The purpose of this paper is to investigate the performance of publicly-traded cannabis equities. Particularly, the goal of this research is to provide academics and practitioners with empirical evidence on how the traditional Fama-French factors, calendar effects, and social media interest explain the equity returns of the relatively new cannabis industry.
Design/methodology/approach – This study uses a sample of cannabis related firms that trade on the Toronto Stock Exchange along with two indices that capture the overall cannabis industry in Canada and the U.S. Using daily data, that spans from January 2014 to April 2019, we apply both OLS and GARCH methodologies to multiple asset pricing models of equity returns. In addition to the Fama-French factors, this research also tests for calendar anomalies such as the day-of-the-week and January effect and a factor related to Twitter interest of cannabis stocks (#potstocks).
Findings – First, our results show that cannabis related investments tend to have low market betas. Second, the three-, four-, and five-factor asset pricing models suggest that the size, profitability, and investment factors tend to have negative and statistically significant coefficients. Third, the coefficient on #potstocks also tends to be positive and significant, suggesting that investors can monitor investor interest via social media platforms and exploit this information to capture excess returns in the cannabis sector. Finally, the day-of-the-week effect suggests that Mondays tend to have statistically significant higher returns, while there is little evidence of the January effect.
Research limitations/implications – This paper serves as a starting point for future research on cannabis investing. As the cannabis market continues to grow and evolve, within Canada and internationally, more financial capital will be required. Thus, both retail and institutional investors around the globe will need to understand the returns and risks associated with this relatively new investment opportunity. As the data sets capturing cannabis-related firms become more robust, further research surrounding the financial activities of cannabis-related firms will be required (e.g., risk management, corporate finance, financing decisions). Moreover, further research in other geographic regions will be required as regulations and legalization of cannabis continue to evolve. Finally, future studies can explore how COVID 19 lockdowns potentially impacted cannabis stock returns.
Keywords
Cannabis stocks, alternative investments, sin stocks, CAPM