Can it be Good to be Bad? : Evidence on the performance of US sin stocks

Abstract: Investment decisions grounded in personal values and societal norms has seen a growth in the last decades, to a point where large institutional investors are abstaining from certain industries that share a specific characteristic altogether. The affiliation with sinful industries that promote human vice is not viewed as socially responsible in the eyes of the public, a reason why socially responsible investment funds that screen out these companies has experienced an increase in popularity. This study sets out to investigate the performance of American sin stocks in an attempt to increase the awareness of how these shunned industries has performed. While the existing literature provides evidence which proves sin stocks outperforms the market, we will provide further evidence concentrating on a mix of industries previously not focused on. Additionally we will extend the observation period beyond what has been done in the past. In this study, the definition of sin incorporates the industries of alcohol, defense, gambling and tobacco, and investigates the performance of a survivorship-free sample of 159 companies between July 1973 and June 2012. As performance measure, the four factor model is employed to capture any abnormal performance in relation to the market with three additional risk factors. In addition, we set out to investigate the performance of the different industries individually, to find if there is any that acts as a driver of the performance. Further, we look into the persistency of the performance over time. We find that the sample outperforms the market with 5.8% annually, and where the tobacco industry stands out with the highest abnormal return, the other industries grouped together still produce significant outperformance. The sinful index examined in this degree project has shown persistent performance, with no obvious trends of growth or decline. Unlike what has been found in previous research, the sample has shown a substantial difference in performance depending on the weighting scheme applied, not only individually for the industries, but also collectively.