Sin stock returns and investor sentiment

• We examine the impact of investor sentiment on a portfolio of sin stocks.
• Higher individual investor sentiment leads to higher sin stock returns.
• Higher institutional investor sentiment also leads to higher sin stock returns.
• After controlling for sentiment, the abnormal returns for sin stocks disappear.
• Investor sentiment has a significant impact on sin stocks’ conditional volatility.

This paper studies the impact of investor sentiment on a portfolio formed of sin stocks—publicly traded companies in the alcohol, tobacco, and gaming industries. Using a variety of sentiments-augmented asset pricing models, this research examines whether investor sentiment is a risk factor for sin stock returns. It also studies if the abnormal returns – found in the literature – for sin stocks persist after controlling for investor sentiment. Furthermore, we utilize a generalized autoregressive conditional heteroscedasticity-in-mean (GARCH) model to study the relationship between investor sentiment and the sin portfolio's conditional volatility. Our findings show that both individual and institutional investor sentiment are priced factors in sin stock returns. Furthermore, after controlling for the role of investor sentiment, the asset-pricing results suggest that the abnormal returns for sin stocks found in previous studies disappear. The results from the GARCH models indicate that investor sentiment has a significant impact on sin stocks’ conditional volatility.