Sin stock anomaly – can it be explained by institutional neglect or ESG performance?

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Journal Title

Journal ISSN

Volume Title

School of Business | Master's thesis

Authors

Date

2023

Department

Rahoituksen laitos

Major/Subject

Mcode

Degree programme

Finance

Language

en

Pages

52+2

Series

Abstract

Sin stock anomaly has gained interest among academics since the mid-2000s. The evidence is mixed but many research papers support the view that sin stocks have generated risk-adjusted excess returns in the US market. The most common argument justifying sin stocks’ outperformance is that sin stocks are shunned because their operations violate prevailing social norms. This aversion causes an imbalance between supply and demand which leads to the situation where sin stocks are consistently underpriced. Underpricing then transfers into abnormal returns. Some older neglect-stock theories from the ‘80s hypothesize that neglected stocks should provide abnormal returns because of information deficiencies and market barriers. In this paper, I test whether the institutional sin stock aversion or generic ESG performance are explaining factors for sin stocks’ claimed excess returns in the US market. I find no evidence that institutional sin stock aversion would cause sin stocks’ abnormal returns. In addition, higher institutional ownership appears to be attributable to higher excess returns. This finding suggests that sin stocks have not outperformed because they are shunned but despite being shunned. Neither the aversion nor abnormal returns have been consistent over time and the sin stock anomaly remains questionable. ESG performance does not have a considerable effect on the aversion of sin stocks. In addition, ESG performance is not an explanatory factor for sin stocks’ excess returns.

Description

Thesis advisor

Joenväärä, Juha

Keywords

sin, abnormal returns, excess returns, ESG, ownership

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Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-202306183952

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[gradu] Kauppakorkeakoulu / BIZ