Abstract
In <b>The Underpricing of Sin Stocks</b> in the June 2020 edition of <b><i>The Journal of Investing</i>, Robert Killins</b> and <b>Hongxia Wang</b> of <b>Coastal Carolina University</b> and <b>Thanh Ngo</b> of <b>East Carolina University</b> discuss “sin stocks,” and in particular, the relative performance of their initial public offerings (IPOs) compared to other IPOs. The authors characterize “sin firms” as those engaged in controversial businesses like alcohol, tobacco, and gaming. Even though the securities of these firms often offer favorable returns, they also often are shunned by investors, and particularly by institutions proscribed by societal norms. The negative reputations of sin firms may contribute to the underpricing of their stocks and their IPOs. The authors find that sin-stock IPOs are underpriced to a greater degree than other IPOs, after controlling for various issuance and company characteristics. Because of this underpricing and the negative reputations of the firms, sin stocks can offer unique return characteristics. Investors willing to ignore the opprobrium may benefit from a reputational risk premium. The authors suggest that managers and individuals take a closer look at these potentially underpriced IPOs and securities as alternative investments. <b>TOPICS:</b>Portfolio theory, portfolio construction
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