Is sinning winning? : an empirical analysis of sin stock returns in the Western world from 2000 to 2019

2020

The purpose of this thesis is to investigate whether sin stocks outperform the market and

comparable utility stocks. We focus on three categories of sin stocks: tobacco, alcohol

and gambling. The constructed sin and comparable portfolios consist of stocks from the

Western world and monthly returns from the last two decades. In the regressions, we

apply the Fama-French three-factor, four-factor (Carhart) and five-factor model, with

and without momentum, to control for possible differences in risk exposure between the

portfolios. We estimate alphas using a long-short investment strategy 1) going long in the

sin portfolio and short in the market and 2) going long in the sin portfolio and short in

the comparable portfolio.

We find statistically significant and positive alphas for the total sin portfolio in excess of

the market. I.e. our findings suggest that sin stocks outperform the market. Our results

also indicate that the market risk factor and the profitability factor are important in

explaining the abnormal returns of sin stocks. However, we do not detect any significant

differences in abnormal returns for the sin portfolio between the continents nor the decades

in our sample, and we only find a return premium for the alcohol portfolio in excess of

the market when we examine the three sin industries separately. Moreover, our results

show that the sin portfolio does not outperform the portfolio of comparable utility stocks,

indicating that investors do not have to sin in order to achieve a return premium.

Keywords – Sin stocks, Utility stocks, Fama and French, Carhart, Abnormal returns