Has Sinning Stopped Winning? A Revised Look at Sin Stock Performance and Recent Trends

Abstract

This thesis investigates the performance of sin stocks between 2000 and 2021. With the historically strong performance of the sector, it is interesting to observe whether investors are turning down abnormal returns as capital is now being pressured towards more sustainable investing. We study the risk-adjusted returns to draw a conclusion on abnormal returns of owning sin stocks and the cost of neglecting the sin stocks in a portfolio. We classify alcohol, tobacco, and gambling as the traditional sin industries, in line with well-known researchers such as Hong and Kacperzcyck (2009). We furthermore argue that the focus on reduced carbon footprint has led to the emergence of a modern sin stock industry, consisting of oil and gas companies, as suggested by researchers such as Sainsbury (2020). Looking at various well-known asset pricing models, we conclude that traditional sin stocks have positive abnormal returns, whereas modern sin stocks do not. However, we do find an absence of abnormal returns in the traditional sin portfolio for the last five years. By studying the difference portfolio, a portfolio that goes long sin stocks and short their comparables, we find no abnormal returns. Indeed, from 2017 to 2021, the difference portfolio yielded negative abnormal returns. This is mainly driven by the equivalent strong performance of comparable companies. We find evidence that sin stocks performed well during the dot-com bubble and financial crisis, although showing no resilience during the Covid-19 crisis. Interestingly, we find a variety of conclusions different to those of Hong and Kacperzcyck (2009) regarding traditional sin stock’s analyst coverage and outside equity financing, amongst others. The main result learned from the thesis is that sin stocks have abnormal returns but with a negative trend the last years. Keywords: Sin stocks, Abnormal returns, Responsible Investing, Alcohol, Tobacco, Gambling, Oil and Gas