Kim, Irene and Mohan Venkatachalam “Are sin stocks paying the price for their accounting sins?”, Unpublished working paper, Duke University, 2006.

Author's abstract:

Recent empirical evidence suggests that sin stocks – publicly-traded stocks in the gaming, tobacco, and alcohol industries are neglected by the stock market despite generating abnormal stock returns. We examine a rational explanation for the neglect of such sin stocks.
Are the excess returns and investor neglect of sin stocks attributable to higher levels of information risk arising from poor financial reporting quality? Alternatively, does a supply-side argument prevail in which sin stocks exhibit higher earnings quality levels in order to attract a
wider investment base and/or because of the regulatory scrutiny and attention on these firms? Our findings are consistent with the latter; sin firms’ financial reporting quality is superior to a control group along three dimensions: earnings and accrual persistence, predictability of earnings for future cash flows, and timely loss recognition. These results imply that, despite superior returns and higher financial reporting quality, investors are willing to bear a financial cost in order to comply with societal norms and reflect non financial tastes in their portfolio by
neglecting sin stocks.


Available at http://dhanna.cox.smu.edu/SMUWeb/workshop/kv.pdf

This citation taken from ECCE's 2007-2008 Top Studies on ESG