How Investor Characteristics Shape Sin-Stock Performance in Europe

Sammanfattning: Whereas the majority of other studies on sin stocks have focused on if there is a sin-stock alpha on a specific geographical market, this paper investigates how and why the sin-stock alpha differs between countries. Specifically, it investigates whether investor characteristics such as welfare, consumption patterns, and religion affect the performance of alcohol, tobacco, and gambling stocks on the European market. To test this, regressions using monthly stock data for a sample of 22 countries, over the time period 1999 through 2017, are run. Firstly, it is found that the sin-stock alpha is greater in high-welfare countries than in low-welfare countries, conceivably due to a greater prevalence of ethical investing and herd bias in the former countries. Additionally, actively choosing to abstain from investing in unethical stocks is reasoned to be a privilege mainly investors in high-welfare countries can afford to enjoy. Secondly, it is found that, generally, the alpha of stocks in companies producing or selling a certain sinful good is greater in countries consuming less, than in countries consuming more, of the sinful good in question. It is argued that familiarity bias and a greater sin aversion among investors in low-consumption countries are two explanations for this alpha differential. Thirdly, and lastly, it is found that the sin-stock alpha is greater in Protestant countries than in Catholic countries, supposedly because Protestants are more sin averse than Catholics. This difference in alphas can also be explained by different welfare and consumption characteristics, however, as the Protestant sample countries have higher welfare and are less heavy consumers of sinful goods, than the Catholic sample countries.