The Price of Controversy: Risk and Return of U.S. Sin Corporate Bonds

Abstract

We examined the financial performance of U.S. corporate bonds issued by industries often considered “sinful,” including alcohol, tobacco, and gaming, from July 2002 to September 2022. The study aimed to determine whether these “sin” bonds yield abnormal returns compared to non-“sin” bonds. Using a comprehensive dataset and robust regression models, our study found mixed results regarding the performance of sin bonds. Regression analyses revealed that sin bonds often yield higher than comparable non-sin bonds when market performance is strong. However, they also show lower excess returns and underperformance relative to the equity market in certain conditions. The yield measures indicate that sin bonds generally have lower credit and T-spreads, suggesting they are perceived as less risky. Key financial factors such as book-to-market ratios and momentum positively influence excess return spreads, while higher credit risk and short-term price declines negatively impact them. These results highlight the complex interplay between ethical considerations and financial performance in the bond market. The implications of this study are significant for investors and policymakers, as they highlight the complex relationship between social norms, ethical investing, and financial performance. Keywords: Sin Bonds, Corporate Bonds, Ethical Investing, Abnormal Returns, U.S. Corporate Bond Market, Credit Spreads, Treasury Spreads, Duration-Adjusted Factors