The Myth of the Sin Premium: Evidence from U.S. Sin Stocks During Periods of Economic Uncertainty

This paper examines the performance and resilience of sin stocks in the U.S. market, focusing on the traditional sin industries of tobacco, alcohol, firearms, and gambling from January 2006 to June 2023. Prior studies often suggest that sin stocks generate abnormal returns and provide defensive benefits during economic downturns; however, evidence on their long-term risk-adjusted performance remains inconclusive. This study addresses this gap by analysing sin stock behaviour across major recessionary periods using t-statistics, the Capital Asset Pricing Model (CAPM), rolling window regression, and event study analysis. The findings challenge the existence of a persistent sin premium. Sin stocks underperform the broader market and show no significant return advantage over ethical investments. Although sin stocks remain relatively volatile, their risk has declined over time to below estimated market risk levels. In addition, their defensive characteristics weaken during periods of economic instability, as both recessionary periods examined produced negative abnormal returns. Overall, the study finds no evidence that investors are compensated for reputational risk or that sin stocks provide reliable protection during market downturns.