The Determinants of Sin Stock Returns: Evidence on the European Market

This article deals with the time-series variation in average sin stock returns – returns on publicly-traded companies involved in producing tobacco, alcohol, and gaming. Next to nothing has been written about this class of stocks, especially on the European stock market. The hypothesis I explore in this paper is that sin stock returns depend on legal and cultural characteristics such as religious preferences, the level of excise taxation, and the degree of litigation risk. Using data on 18 European countries over the period 1975-2006, my results show evidence that Protestants are more "sin averse" than Catholics, and require a significant premium on sin stocks. Moreover, sin stocks have higher risk-adjusted returns when they are located in a country with high excise taxation; and sin stocks outperform other stocks when the litigation risk is higher, even after controlling for well-known risk factors such as market capitalization and book-to-market ratio. These findings suggest that sin stock returns depend on both legal and religious environments of each country.