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In this study, I have examined whether sin stocks in alcohol, tobacco and gambling industries have provided investors abnormal positive returns in Western Europe. I estimate the returns with Capital Asset Pricing Model, Fama-French Three-Factor Model and Carhart Four-Factor Model and find that the Sin Portfolio returns have a positive alpha during the period 2000-2021. The findings show that the Sin Portfolio returns 0.40% monthly after controlling with commonly known variables SMB, HML and MOM. Furthermore, I examine the industry returns individually and by excluding each industry from the Sin Portfolio one by one and find that gambling drives at least partly the returns of the Sin Portfolio. Although the share of gambling stocks is rather small in the Sin Portfolio, excluding these stocks results in the disappearance of significant abnormal returns of the Sin Portfolio. Results suggesting that gambling stocks drive the returns are somewhat contradictory to previous research since Troberg’s (2016) results show that significant abnormal returns do not disappear when excluding gambling stocks from the Sin Portfolio. Additionally, I employ Carhart Four-Factor Model to study the returns of the Sin Portfolio during the ongoing Covid-19 pandemic. I find positive but not significant alpha for the Sin Portfolio during the pandemic. I also inspect each industry during the pandemic and find that only the gambling industry has significant alpha, at 1% level. Results suggest that sin stocks ex. gambling has not provided significantly abnormal results during the pandemic. Inspecting relatively low market betas of the Sin Portfolio and each industry portfolio (alcohol, tobacco and gambling) separately, I find that sin industries possess defensive characteristics. Previous literature has found supportive evidence, as Troberg (2016) shows that sin stocks are quite resistant against recessions and recover rapidly from sinking markets. Salaber (2009) examines the US stock market and finds that sin stocks outperform during the bear market but underperform during the bull market. Prior literature suggests that the defensive characteristics of sin stocks might arise from their addictive traits.

The results provide further evidence on the outperformance of sin stocks and that the phenomena occur broadly in various market areas. Whereas there are studies from the US (eg., Hong and Kacperczyk, 2006; Richey, 2017) and the whole of Europe (eg., Troberg, 2016; Salaber, 2009), I examine specific region including countries in Western-Europe and find that results stay similar.

Interestingly, outperformance of sin stocks is a long term phenomenon and although it has been known in prior studies for over a decade, the markets have not corrected it, which violates the

efficient market hypothesis. A popular explanation for the abnormal returns of sin stocks is that they are shunned by investors, which makes them systematically underpriced. Investing in sin stocks might cause reputation risk to investors. Hong and Kacperczyk (2006) suggest that there is a social norm against funding businesses that promote vice and that some investors, particularly institutions that are subject to norms avoid these stocks. Merton’s (1987) “neglected stock” theory suggests that stocks with lower interest among investors will be covered by fewer analysts and therefore provide abnormal returns for investors. As Socially Responsible Investing (SRI) is gaining popularity and investors are more self-conscious of their investment decisions, the demand for irresponsible investments is potentially decreasing. Troberg (2016) finds that there is a positive correlation between the money invested in SRI funds and returns of the sin stock. An interesting aspect for future research is to see how the increasing popularity of SRI investing will affect the returns of sin stocks.

Even though the sin stocks provide services and products that have harmful effects for society and are considered unethical, these companies do not generally operate unethically. For instance, Cai et al. (2011) argue that US companies in sin industries consider corporate social responsibility essential in their operations although they provide harmful products or services. Furthermore, Kim and Venkatachalam (2011) find that sin companies’ financial reporting quality is superior related to their benchmark group. It is important to note that what is seen as a sin stock can change over time. While companies defined as sinful can change their product mix or revenue sources that can lead to reclassification, the shift can also be contrary. As norms and values change, the definition of sin industries can also change.


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38 Bwin Intact.Entm. Gambling Austria

39 Bwin Party Digital Entm. Gambling United Kingdom

40 C&C Group (Dub) Alcohol United Kingdom

81 Holt (Joseph) Alcohol United Kingdom

123 Pivovar Radegast Delisted 01/10/02 Alcohol Czech Republic

124 Pivovary Lobkowicz Group Alcohol Czech Republic

125 Playjack Gambling Germany

126 Playtech Gambling United Kingdom

127 Pol-Roger Et Compagnie Limited Data Alcohol France

128 Praesepe Gambling United Kingdom

158 The Artisanal Spirits Company Alcohol United Kingdom

159 Thwaites (Daniel) Alcohol United Kingdom

167 Wap Integrators Gambling United Kingdom

168 Webis Holdings Gambling United Kingdom

169 William Hill Gambling United Kingdom

170 World Gaming Gambling United Kingdom

171 Wuerzburger Hofbraeu Alcohol Germany

172 Zeal Network N Gambling Germany