The sin effect : an analysis of sin stock returns in the US, UK and Japan

Abstract

Our paper examines the existence of a “sin premium” for alcohol, tobacco and gaming stocks in the US, UK and Japan, and analyses historical stock returns of sin stocks while correcting for common return predictors and industry effects. Our paper differs from earlier works on the subject on several counts. In addition to conducting Fama-MacBeth regressions, our paper is the first to use a Kalman filter approach to examine sin stock returns. With emphasis on meticulous data collection, our analysis has been manually corrected for misclassifications in popular databases that may have affected previous studies. At 346 identified sin stocks for the three countries, the paper has one of the largest sin stock samples to be analyzed to date. Results from the Fama-MacBeth regressions indicate a return premium for sin stocks in the US and UK. The Kalman filter supports the conclusion for the US, but is inconclusive for the UK. Neither methods find significant evidence for a sin premium in Japan.