The Underpricing of Sin Stocks

Abstract

Sin firms engage in alcohol, tobacco, and game-related business activities. Using a sample of initial public offerings (IPOs), the authors examine the performance of sin and non-sin firm IPOs. The authors find that sin firm IPOs are more underpriced than non-sin firm IPOs after controlling for pre-issuance firm and issuance characteristics, such as asset size, firm age, lead underwriter’s reputation rank, listing exchange, and issuance size, providing further confirming evidence to the shunned-stock hypothesis and reasons for increased interest in alternative investments. The research enriches the current literature on sin firms and IPOs.

TOPICS: Portfolio theory, portfolio construction

Key Findings

• • Sin firms have a unique return characteristic, which may be the result of investment firms’ focusing on more socially acceptable firms.

• • As the general sentiment surrounding socially responsible (or acceptable) investments continues to gain strength, investors who are willing to provide capital to sin firms may be able to obtain a reputational risk premium.

• • As social norms and the legal environment (e.g., cannabis and sports gambling legalization) continue to evolve, asset managers need to be aware of the potential return characteristics of new equity offerings from nontraditional firms.