Henley Business School
|Date of event:||24 February 2016|
|Event ends:||24 February 2016|
|Price:||Free to attend|
The annual Henley Business School Public Lecture will be delivered by Dr Andreas Hoepner, Associate Professor of Finance, ICMA Centre, Henley Business School.
In this year’s talk Dr Hoepner will look at whether investing in alcohol, tobacco or gambling firms – the so called sin stocks – is worth it? Previous work, widely communicated in the financial press, has found that these stocks significantly outperform financial market benchmarks. This evidence is used as a justification for investing in these types of firms, despite investors personal reservations about the merit of these products.
Using a financial data science perspective, this lecture will explain why sin stock outperformance may not in fact be a reality and will consider the implications for investors when they want to connect their personal values with their investment aspirations.
In their widely influential work, Harrison Hong & Marcin Kacperczyk [HK] (2009) appear to document a significant outperformance vis a vis stock market benchmarks of so- called sin stocks: publicly traded companies involved in producing alcohol, tobacco and gaming. This finding has been widely reported in mainstream media and frequently used as justification to disconnect personal values from investment value. Motivated by a line of criticism against their research design, Dr Hoepner and his co-author Hampus Adamsson re-examine whether the sin stocks premium recorded by HK is actually investable for real world investors such as pension funds or derives from an ‘ivory tower style’ research design. To ensure a real world research design, they deviate from HK in three ways:
(i) They limit their analysis to only those stocks included in the global equity index benchmarks commonly used by pension funds. They are thereby excluding thousands of stocks which HK include in their equal weighted portfolios of sin stocks that are usually considered too illiquid in practice.
(ii) Equal-weighted portfolios of sub-industry such as alcohol, tobacco and gambling are, however, practically barely investable for many institutional investors with their market-value-weighted benchmarks. Hence, they value-weight our sin-industry portfolios, which leads the outperformance of gambling firms to disappear.
(iii) The standard model for assessing investment strategies proposed by Fama & French (1993) and also used by HK is not designed to capture return differentials between small cap and large cap firms in a single sector such as consumer goods, which could drive the returns of sub-industries in this sector such as alcohol and tobacco. Hence, they add within sector control variables to the model which leads to a complete disappearance of any outperformance of sin stocks.
In summary, their findings imply that the sin stock outperformance is likely an artefact of an ivory tower research design and unlikely applicable to the real world. In this sense it appears financially safe for investors to connect their personal values with their investment value and underweight or exclude alcohol, tobacco or gambling stocks from their portfolios.
Henley Business School