Sin Stocks Revisited: Resolving the Sin Stock Anomaly

Abstract

Various studies report that investing in “sin stocks”, that is firms which make money from human vice, such as alcohol, tobacco, gambling and weapons, has historically delivered significantly positive abnormal returns. This finding has inspired the hypothesis that sin stocks are being shunned to such an extent that they end up being systematically underpriced, enabling other investors, who are willing to bear the reputation risk involved with investing in these stocks, to earn a return premium. In this article, the authors further investigate this notion, finding that the performance of sin stocks can be fully explained by the two new quality factors in the recently introduced Fama-French 5-factor model, profitability and investment. Their finding is robust over time and across different markets. In short, there is no evidence that sin stocks provide a premium for reputation risk after controlling for their exposure to factors in today’s asset pricing models.

Keywords: sin stocks, vice, quality, profitability, investment, asset pricing, 5-factor model

JEL Classification: G11, G12, G14