eThesis - Kauppakorkeakoulun sähköiset gradut

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In this paper I study the returns of sin stocks on European markets. The sin stocks here include alcohol, tobacco, gambling and defence industries. Nowadays, the increasing awareness of health issues caused by sin products has influenced the investors' behaviour, which may have sizeable price effects of these stocks. I find evidence, that a portfolio long sin stock earns both financially and statistically significant abnormal returns over the market return. I also match the sin industries with their virtuous comparables. I run the most important time-series regression analyses with both sin and comparable industries to examine more accurately effects of societal norms on stock returns.

I further hypothesize the sin stocks to be undervalued. I study that with two value factors; market-to-book and price-to-earnings ratios. I find some contradictory evidence about the undervaluation theory, but the recent trend supports the theory about deeper undervaluation. The undervaluation may be due to the lack of arbitrageurs, such as institutional investors, who have to rule out sin stocks because of societal norms. Thus, I study the effects between the amount of money invested in socially responsible investment funds and the returns of sin stocks.

Additionally, I study some other sin stock characteristics. By examining the single-factor CAPM betas, I find that the sin stocks are relatively stable against the market fluctuations. Furthermore, I find that they are fairly resistant against recessions and recover quickly from sinking markets.