Fewer reasons to sin: a five-factor investigation of vice stock returns

Purpose The purpose of this paper is to investigate the return performance of a portfolio of US “vice stocks,” firms that manufacture and sell products such as alcohol, tobacco, gaming services, national defense and firearms, adult entertainment, and payday lenders. Design/methodology/approach Using daily return data from a portfolio of vice stocks over the period 1987-2016, the author computes the Jensen’s α (capital asset pricing model (CAPM)), Fama-French Three-Factor, Carhart Four-Factor, and Fama-French Five-Factor results for the complete portfolio, and each vice industry individually. Findings The results from the CAPM, Fama-French Three-Factor Model, and the Carhart Four-Factor Model show a positive and significant α for the vice portfolio throughout the sample period. However, the α ’s significance disappears with the addition of the explanatory variables from the Fama-French Five-Factor Model. Originality/value The author provides academics and practitioners with results from a new model. As of this writing, the author is unaware of any articles published in peer-reviewed academic journals that investigate vice stocks within the framework of the Fama-French Five-Factor Model (2015). First, the existing literature does not shed light on the relationship between “profitability” and “aggressiveness” (the fourth and fifth factors of the Fama-French Model) and vice stock returns. Second, within the framework of the Fama-French Five-Factor Model, the author shows results not only from a portfolio of vice stocks, but from various vice industries as well.