Measuring Business Social Irresponsibility: The Case of Sin Stocks

Abstract

The existing literature identifies sin stocks using industry classification codes (IC). We propose an alternative continuous measure of firms’ exposure to sin activities (sinfulness) based on textual analysis (TA). Sinfulness captures nicely both the cross-sectional and time-series variation in firms’ exposure to sin activities. TA reveals a significant number of false-positive and false-negative sin stocks in IC. Neither equal- nor value-weighted portfolios of sin stocks show abnormal returns. However, a sinfulness-weighted portfolio earns an annualized alpha of 5%. This abnormal performance is not explained by common factors, crash risk, or mispricing, but is significantly related to legal risk.

Keywords: Business social responsibility, Sin stocks, Textual analysis

JEL Classification: G11, G12, G14, D71