Sin Stocks Revisited: Resolving the Sin Stock Anomaly

Do sin stocks offer a premium to investors?

The study Sin Stocks Revisited: Resolving the Sin Stock Anomaly revisits the concept of sin stocks in light of new developments in asset pricing theory, particularly Fama and French's introduction of quality factors.

David Blitz and Frank J. Fabozzi delve into the performance of sin stocks (companies involved in activities considered unethical or immoral) and evaluate the sin stock premium using asset pricing models.

Their main results and implications include:

• The previously observed higher returns of sin stocks can be fully explained by their exposure to previously introduced asset pricing factors, specifically the profitability and investment factors proposed by Fama and French in 2015.
• After adjusting for these quality factors (along with traditional ones), the abnormal returns of sin stocks disappear, indicating there is no additional premium for bearing the reputation risk associated with these stocks.
• This finding holds true across different markets, including the U.S., Europe, and Japan, suggesting the absence of a sin stock anomaly is a global phenomenon.
• Investors excluding sin stocks from their portfolios due to ethical considerations may face a performance loss not because of a unique sin stock premium but due to missing out on positive exposures to profitable and low-investment factors.

This study challenges the traditional view that sin stocks offer a unique premium due to being systematically underpriced as a result of widespread investor shunning.

It contributes to the asset pricing literature by demonstrating the importance of considering quality factors in explaining stock returns before adjusting portfolios to avoid performance loss while maintaining ethical standards.

Critics may argue for a broader set of factors or alternative explanations beyond the scope of current asset pricing models to fully understand the nuances of sin stock performance.