Sin Stocks and Sustainable Investing. An Empirical Study on Multi-factor Models

Abstract

The purpose of this paper is to analyze a portfolio of so-called “sin stocks”, i.e. companies providing products or services considered immoral compared to common standards of ethics. The sample used for the analysis involves tobacco firms, gambling companies, alcohol producers operating both in Europe and in the United States. The “sin” concept is paired with the Capital Asset Pricing Model (CAPM), Return-based Style Analysis Methodology and Event Study Approach. Specifically, the two research hypotheses to test aim to understand whether the sin stock portfolio earns abnormal returns over the market portfolio and whether the sin stock fund performance is composed of style and selection factor. To test the former, the methodology used is based on SCL regressions. Since the intercept is significant at 95% confidence, this means EU and US sin stocks are characterized by positive and significant abnormal returns compared to the related EU and US market indexes. Regarding the latter, the higher values of the “constrained” betas associated with specific asset classes show there is evidence of a certain investment style of the fund managers that often prefers more equity than fixed income. Lastly, the event study application proves the significance of the sin stocks’ abnormal returns over the event date 11/03/2020, i.e. the day the World Health Organization has publicly declared Covid-19 as a global pandemic worldwide, meaning that the event is statistically significant.