Salaber (2007)

Salaber, Julie.  "The Determinants of Sin Stock Returns: Evidence on the European Market."  Working paper (Université Paris-Dauphin), 2007.

In the spirit of Hong and Kacperczyk (2006, 2008), this study investigates sin stock returns - returns on publicly-traded companies involved in producing tobacco, alcohol, and gaming. Whereas the former study concentrates on U.S. sin stocks, this study investigates this class of stocks in European stock markets. The hypothesis central to the study is that sin stock returns depend on legal and cultural characteristics, including religion, the level of excise taxation, and litigation risk. Using data on sin stocks from 18 European countries over the period 1975-2006, the study finds evidence that Protestants are more "sin averse" than Catholics, and command 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 outperform other stocks when litigation risk is higher. The results continue to be significant after controlling for well-known risk factors, such as market capitalization (size), and book-to-market premiums. Taken as a whole, this study suggests that sin stock returns depend on both legal and religious environments of each country.

(Note: implicit in this study, however, is the assumption that stock markets around the world are somewhat segmented, and that investors cannot hold perfectly diversified portfolios. Otherwise, several risks mentioned in the paper, such as litigation risk, could be considered diversifiable.)