Roberts and Young-Ferris’s paper details the frustrations that a large global fund manager (InvestCo) encountered trying to quantify and systematise ESG analysis within an investment process reliant upon a traditional financial accounting framework.

PRI and Sycomore award for the most outstanding research in responsible investment: BEST QUANTITATIVE PAPER

The ‘Price of Sin’ Aversion: Ivory Tower Illusion or Real Investable Alpha?

Hampus Adamsson (Research Fellow, ICMA Centre, Henley Business School, University of Reading), Andreas Hoepner (Associate Professor in Finance at the ICMA Centre, Henley Business School, University of Reading)

Adamsson and Hoepner’s paper The ‘Price of Sin’ Aversion: Ivory Tower Illusion or Real Investable Alpha? argues that the apparent “return on vice” found by an influential 2009 study is an illusion.

Hong & Kacperczyk’s (H&K) pioneering 2009 work examined US “publicly-traded companies involved in producing alcohol, tobacco and gaming” between 1965 and 2006. The authors found that these stocks significantly outperformed the market – a so-called “sin stock premium” – which they explained by institutional investors deserting sin stocks on ethical grounds.

Adamsson and Hoepner re-examined H&K’s methodology and find that this apparent “return on vice” is likely to be an illusion created by a research design that contains statistical inaccuracies and would not apply to the real investment world. The study provides a useful example of how claims about the market effects of exclusionary screening can and should be interrogated.

Challenging the research design

Adamsson and Hoepner identified several weaknesses in H&K’s research:

  • The sample was predominantly US sin stocks, hence largely ignoring cultural differences across different geographical markets.
  • Many stocks included in the sample would not have been investable in the real world because they ignore common investment criteria, such as market capitalisation, liquidity and trading volume.
  • An equal-weighted portfolio of sin stocks was compared against a value-weighted market benchmark.
  • No sub-sample analysis between 1965 and 2006 was conducted, so any outperformance could have stemmed from decades ago.

Re-examininig the data

The authors included in their analysis sin stocks listed on the FTSE All- World index, examining returns data between 2002 and 2013. They developed a methodology to address the weaknesses in H&K’s research by studying:

  • how cultural differences affect sin stock performance across different countries;
  • sin stocks listed on a major international index;
  • value-weighted as well as equalweighted sin portfolios, to test if the out-performance found by H&K could simply be due to an over-weighting of small cap stocks and under-weighting of large cap stocks;
  • additional statistical controls for the known outperformance of small cap stocks (H&K only apply these controls market-wide – Adamsson and Hoepner also apply them within sectors).


By interrogating previous claims, Adamsson and Hoepner show that the investment premium associated with sin stocks is likely to be an illusion produced by various manifestations of size bias created by the weighting given to small-cap and large-cap stocks within a given sin stock portfolio. Careful correction of this bias results in the “return on vice” disappearing.

The small-cap heavy, equal-weighted portfolios all generated higher returns than their market capitalisation weighted counterparts. However, using a value-weighted portfolio led to a significant decline in performance, implying that any outperformance is driven by small-cap bias, as small stocks outperform large stocks. For gambling, the sin premium disappeared and when controls for industry-specific factors were then added, any outperformance by the other value-weighted portfolios was wiped out too.

Using just US data, the equal-weighted portfolios outperformed in line with H&K’s results. However, the value-weighted alcohol and tobacco portfolios no longer showed any significant outperformance and the gambling portfolio underperformed by 42 basis points.

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    RI Quarterly vol. 8: Highlights from PRI In Person 2015

    September 2015