Sin Stocks Research Articles

ESG Outcasts: Study of the ESG Performance of Sin Stocks

Certain economic actors are considered by many as involved in or associated with an activity that is considered unethical or immoral, such as the producers of tobacco, alcohol and firearms (often referred to as sin stocks). In an environment in which stakeholders are increasingly interested in sustainable development and corporate social responsibility, it is important to understand how firms respond to these issues which divide public opinion. Our study compares the environmental, social and governance (ESG) performance for a targeted sample of 79 sin stocks and a control group of comparable firms. We observe that sin stocks have a lower overall ESG performance as well as for each of the three ESG pillars, and that this difference is more significant in relation to governance and some key social and environmental issues for which sin stocks could have compensated risk exposure with responsible management practices. In other words, our results demonstrate that sin stocks are exposed to more severe ESG issues and consistently lack the necessary practices to mitigate these issues. Our study provides relevant insights into the informativeness of ESG scores to distinguish firms (and sectors) investing in management practices that offset ESG risk exposure.

Who owns tobacco stocks?

We compare the ownership characteristics of tobacco stocks with their peers in the same country and industry group. We find lower reported ownership for stocks in the tobacco industry, which suggests that anonymous investors are larger owners of these sin stocks. Compared to peer stocks, U.S. and U.K. asset managers collectively overweight tobacco stocks, while norm-constrained investors such as sovereign wealth funds and pension funds underweight tobacco stocks. Passive managers have large stakes in tobacco stocks that are in line with the weights of these stocks in broad capitalization-weighted indices, indicating that passive replication of ethically screened indices is still a niche. We also identify some prominent active investors who take large positions in tobacco stocks.

Practical Applications of Is It Good to Sin When Times Are Bad?An Investigation of the Defensive Nature of Sin Stocks

In <b>Is It Good to Sin When Times Are Bad? <i>An Investigation of the Defensive Nature of Sin Stocks</i></b> from the October 2020 issue of <i>The Journal of Investing</i>, author <b>Greg Richey</b> (of the <b>University of California at Riverside</b>) examines a variety of so-called sin industries, individually and altogether, to evaluate their resistance to downside risk as compared with the S&amp;P 500 Index. Using an EGARCH model, Richey is able to show that negative market shocks, or “bad news events,” have a less negative impact on sin stock returns than do positive market shocks, or “good news events.” Using the VIX (also known as the <i>fear index</i>) for stock market volatility, he also indicates that VIX increases lead to delayed increases in anticipated volatilities for a mixed portfolio of various sin stocks. Overall, this makes sin stocks seem like a wise defensive choice for resisting negative shocks. <b>TOPICS:</b>Portfolio theory, portfolio construction, ESG investing

Practical Applications of The Underpricing of Sin Stocks

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

Practical Applications of The Underpricing of Sin Stocks

In The Underpricing of Sin Stocks in the June 2020 edition of The Journal of Investing, Robert Killins and Hongxia Wang of Coastal Carolina University and Thanh Ngo of East Carolina University 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. TOPICS:Portfolio theory, portfolio construction

The Moral Investor: Sin Stock Aversion and Virtue Stock Affinity

Does morality in business affect investors’ choice of stocks? Building on the source preference literature, we propose a novel measure of moral stock preference and offer a nested model relating it to social preference, attention to corporate social responsibility (CSR), and belief bias. We investigate moral stock preference experimentally in terms of sin stock aversion (SSA) and virtue stock affinity (VSA) and arrive at three main findings: (1) SSA and VSA are both observed, with the effect of SSA being stronger, (2) SSA/VSA is positively correlated with social preference, with the effect of altruistic giving being stronger than that of trust or trustworthiness, and (3) SSA/VSA is correlated with belief bias, the effect of which is stronger than that of social preference. The asymmetry between SSA and VSA – avoiding “bad” matters more than doing “good” – points to moral loss aversion based on a disproportionate avoidance of sin stocks compared to favoring virtue stocks. Together, our findings demonstrate the validity of our model, with social preference, attention to CSR, and belief bias working in tandem to capture the decision maker’s moral stock preference.

Does excluding sin stocks cost performance?

We examine the impact of excluding sin stocks on expected portfolio risk and return. Exclusions involve risk relative to the market and peers. We show how this tracking error can be translated into an equivalent loss in expected return, which is negligible at low tracking error levels, but not at higher levels. However, even modest ex ante tracking error levels may lead to sizable compounded underperformance ex post. Taking an asset pricing perspective we find that popular exclusions typically go against rewarded factors such as value, profitability, and low-risk, which is harmful for expected portfolio returns. Theoretically sin itself may also be a priced factor, but this is not supported by the empirical evidence. A sin premium might arise in the future though, if exclusion policies reach the scale needed to significantly raise the cost of capital of sin stocks. Tracking error may be minimized and expected portfolio return restored by filling the gap left by excluding sin stocks with non-sin stocks that offer the best hedging properties and similar or better factor exposures.

Who owns tobacco stocks?

We compare the ownership characteristics of tobacco stocks with their peers in the same country and industry group. We find lower reported ownership for stocks in the tobacco industry, which suggests that anonymous investors are larger owners of these sin stocks. Compared to peer stocks, U.S. and U.K. asset managers collectively overweight tobacco stocks, while norm-constrained investors such as sovereign wealth funds and pension funds underweight tobacco stocks. Passive managers have large stakes in tobacco stocks that are in line with the weights of these stocks in broad capitalization-weighted indices, indicating that passive replication of ethically screened indices is still a niche. We also identify some prominent active investors who take large positions in tobacco stocks.

Women oppose sin stocks more than men do

We experimentally test whether men and women differ in their propensity to hold morally controversial (“sin”) stocks. Participants (N = 335) were recruited via Mechanical Turk and rated the moral appropriateness and level of comfort resulting from holding controversial and conventional stocks. Results show that women rate sin stocks as less morally appropriate investment propositions and feel considerably less comfortable investing in controversial (but not conventional) stocks. Sex differences in sin stock tolerance were substantial (d = .60) and remained significant after accounting for differences in investment knowledge and risk tolerance. We discuss two important outcomes of these differences.

Exclusionary Screening

Investors want their assets to be a force for good, or at least to do no harm. Approaches range from avoiding companies or sectors deemed to fail on ethical grounds through to active engagement with companies. Exclusionary screening is the most prevalent approach to ESG investing, and may focus on individual stocks or entire sectors. In this article, the authors take two perspectives. First, they report on the returns since 1900 from tobacco and alcoholic beverage companies. They show that the returns from these sin stocks have substantially beaten the market in both the US and UK, and they evaluate explanations for this. Second, the authors extend their analysis to other large-scale exclusions such as those demanded by climate activists, Sharia-complaint investors, or dharmic investors. In a historical analysis of the return and risk impact from such screens, the authors find that, while divestment may exert downward pressure on stock prices, the impact of protracted and sustained exclusions is, on average, small. <b>TOPIC:</b>ESG investing <b>Key Findings</b> • ESG investors can choose between using voice (engagement) and exit (screening out unacceptable companies). If many investors exclude a company or sector, this may exert downward stock-price pressure, in which case one can expect an enhanced return from holding the stock. • Consistent with this, tobacco and alcoholic beverage companies have generated superior returns over the last 120 years. Alternatively, the performance of low-ESG companies may reflect their underlying risk exposures. The authors discuss how to harvest their risk premia through factor investing. • Some investors wish to make large-scale exclusions based on carbon exposure or other broad criteria. The authors show that, for the portfolio as a whole, such exclusions have historically had a relatively small impact on long-term returns and risk.

ANALYSIS OF ECONOMIC GROWTH, OIL STOCKS AND SIN STOCKS IN UNITED STATES

This study aims to examine whether oil stocks can affect US GDP more than sin stocks. Because if oil stocks can increase GDP growth in America, America can reduce the sin stocks that tends to be controversial in society. The data in this study use GDP growth, stock price returns on oil stocks and sin stocks in the United States. Data obtained through the World Bank and reuters in the form of annual data from 2000 to 2017. There are 9 oil companies and 8 sin companies engaged in the alcohol, gambling and tobacco sectors. The data used is time series data. The results of the analysis are that each type of stock has different characteristics. Not all types of stock affect economic growth in a country. In this study, oil stock has no influence on the economic growth of the United States, even though the United States is the largest oil producer in the world. While the sin stocks which is considered an immoral stock actually has a big influence on the economic growth of the United States. Where, the United States also has the largest sin stock in the world.

Is It Good to Sin When Times Are Bad? An Investigation of the Defensive Nature of Sin Stocks

In this article, I use an EGARCH model to investigate whether a portfolio of sin stocks is less resistant to downside risk or losses during market downturns than is the S&P 500, a benchmark to approximate the market portfolio of risky stocks. In addition, I use the aforementioned model to analyze the defensive nature of individual sin industries (alcohol, tobacco, gambling, and defense) against the market portfolio. This article contributes to the existing literature on sin investing in two ways. First, my results illustrate the defensive nature of sin stocks and help reinforce the notion that sin stocks have some immunity from downside risk due to cyclical fluctuations and economic downturns. Second, I show results not only from a portfolio of sin stocks, but from various sin industries as well. The industry results highlight the defensive nature of sin stocks, an important component of their risk-adjusted returns. TOPICS:Portfolio theory, portfolio construction, ESG investing Key Findings • Bad-news events have a lesser impact on sin stock return volatility than do good-news events. • Increases in the volatility index (VIX) lead to increases in the overall volatility of sin stocks. • Sin stocks have had higher returns and Sharpe ratios than the market portfolio and sin industry funds’ returns have been less correlated with each other than they have been with the market portfolio.

Spreading the sin: An empirical assessment from corporate takeovers

An acquisition of a company involved in socially undesirable activities can have important value implications. On the one hand, stocks in sin industries can be undervalued, and positive wealth effects might be created through risk sharing and a halo effect. On the other hand, acquiring sin stocks could increase litigation risk and the chance of product boycotts, and could hurt relations with employees and other stakeholders. Moreover, many investors avoid investments in sin stocks by applying negative screening. This article empirically establishes that shareholders of acquirer firms on average discount sin acquisitions. The negative wealth effects are stronger in countries with a greater focus on corporate social responsibility and for deals that are more likely to receive public attention. The article concludes that the costs of “sin” are considerable.

The Underpricing of Sin Stocks

Sin firms engage in alcohol, tobacco, and game-related business activities. Using a sample of initial public offerings (IPOs), we examine the performance of sin and non-sin firm IPOs. We find that sin firm IPOs are more underpriced than non-sin firm IPOs after controlling for pre-issuance firm and issuance characteristics, such as asset size, firm age, lead underwriter’s reputation rank, listing exchange, and issuance size, providing further confirming evidence to the shunned-stock hypothesis and reasons for increased interest in alternative investments. Our research enriches the current literature on sin firms and IPOs. TOPICS:Portfolio theory, portfolio construction Key Findings • Sin firms have a unique return characteristic, which may be the result of investment firms’ focusing on more socially acceptable firms. • As the general sentiment surrounding socially responsible (or acceptable) investments continues to gain strength, investors who are willing to provide capital to sin firms may be able to obtain a reputational risk premium. • As social norms and the legal environment (e.g., cannabis and sports gambling legalization) continue to evolve, asset managers need to be aware of the potential return characteristics of new equity offerings from nontraditional firms.

Climate Sin Stocks: Stock Price Reactions to Global Climate Strikes

The first Global Climate Strike on March 15, 2019, represented a historical turning point in climate activism. We investigate the cross-section of stock price reactions to this event for a large sample of European firms. The strike's unanticipated success caused a decrease in the stock prices of carbon-intensive firms. The effect appears to be driven by the increased public attention to climate activism. Furthermore, after the first Global Climate Strike financial analysts downgraded their longer-term earnings forecasts on carbon-intensive firms.

ESG Investing: From Sin Stocks to Smart Beta

Research on socially responsible investment in equity markets initially focused on sin stocks. Since then, the availability of data has been extended substantially and now covers environmental, social, and governance (ESG) criteria. Using ESG scores of firms belonging to the MSCI World universe, the authors measure the impact of score-based exclusion on both otherwise passive investment and smart beta strategies. They find that exclusion leads to improved scores of initially standard portfolios without deterioration of the risk-adjusted performance. Smart beta strategies exhibit a similar pattern, often in a more pronounced way. Moreover, the results demonstrate that exclusion also implies regional and sectoral tilts as well as (possibly undesirable) risk exposures of the portfolios. TOPICS:Portfolio theory, portfolio construction, ESG investing Key Findings • The authors show that environmental, social, and governance (ESG) screening can substantially improve ESG scores for both otherwise passive and smart beta portfolios without reducing risk-adjusted returns. • Starting from initially passive multicountry portfolios, ESG screening may lead to substantial regional tilts, such as overweighting Europe and underweighting the US and emerging countries or sectoral bets, for instance in favor of information technology and against financial and energy stocks. • Although the broad conclusion of improved ESG profile without affecting risk-adjusted performance also holds for smart beta portfolios, aggressive exclusion of ESG low-scoring firms may lead to some reduction in exposure to targeted factors.

Responsible Investing: The ESG-Efficient Frontier

We propose a theory in which each stock’s environmental, social, and governance (ESG) score plays two roles: 1) providing information about firm fundamentals and 2) affecting investor preferences. The solution to the investor’s portfolio problem is characterized by an ESG-efficient frontier, showing the highest attainable Sharpe ratio for each ESG level. The corresponding portfolios satisfy four-fund separation. Equilibrium asset prices are determined by an ESG-adjusted capital asset pricing model, showing when ESG increases or lowers the required return. Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing. Finally, we test our theory’s predictions using commercial ESG measures, governance, sin stocks, and carbon emissions.

A Study on the Code of Disease of Game Addiction and the Classification of Sin Stocks for Game Companies

A Study on the Code of Disease of Game Addiction and the Classification of Sin Stocks for Game Companies

A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Green Investing and Sin Stock Exclusion

This paper shows how sustainable investing affects asset returns through exclusionary screening and environmental, social, and governance (ESG) integration. I develop an asset pricing model with partial segmentation and heterogeneous preferences. I characterize two taste premia that clarify the relationship between ESG and financial performance and two exclusion premia generalizing Merton's (1987) premium on neglected stocks. By using the holdings of 453 green funds investing in U.S. stocks between 2007 and 2019 to proxy for sustainable investors' tastes, I estimate the model applied to green investing and sin stock exclusion. The annual taste effect ranges from -1.12% to +0.14% for the different industries and the average exclusion effect is 1.43%.

Real-time PM2·5 air pollution and social preferences: a large-scale behavioural game study using mobile apps in mainland China

BackgroundAir pollution undermines people's physical health. So why wouldn't people take actions to reduce air pollution? We argue that social preferences might play a part. Specifically, we examined the links between air pollution, interpersonal trust, and preferences to buy so-called sin stocks (companies that polluted the environment). Because previous research has shown that high pollution induces a belief in immorality as a social norm (akin to “broken-window” effect), we predicted that pollution is linked to lower trusting and trustworthy behaviours, and higher likelihood to buy sin stocks. Second, we examined the moderating role of participants' subjective socioeconomic status (SSES). Specifically, previous studies have shown that low SSES induces a feeling of deprivation and higher vulnerability. Therefore, we predicted an interaction between pollution and SSES, such that low SSES participants in highly polluted environment should display the lowest levels of trusting and trustworthy behaviours, and highest likelihood to buy sin stock. MethodsWe recruited 4177 participants residing in 31 provinces of mainland China during January, 2018. Participants were asked to play three incentivised behavioural games measuring their likelihood to buy sin stocks, trusting behaviour, and trustworthiness, respectively. We disseminated our survey via a mobile phone application, making it possible to pay the participants according to their performance on the games, and estimate the instantaneous, real-time air pollution (PM2·5) from dynamic monitoring station data based on each participant's GPS information. FindingsWe found a robust main effect of pollution and an interaction effect between SSES and real-time PM2·5 levels, as we had predicted. InterpretationOur findings counter the common wisdom that people are motivated to take actions to improve their own environment. Instead, a polluted environment could create a bad norm that undermines trust and environmental protection. FundingPartial funding came from a seed grant for the Chinese University of Hong Kong (CUHK)—Chinese Academy of Social Sciences (CASS) Research Collaboration on Social Psychology offered by the Research Committee of CUHK.