Corporate culture, strength, cohesion, alignment, and ethics
The narrative that "Vice Pays" may only be true for monopolies. A study on "Sin Stocks" (abortion, gambling, pornography) found that while large-cap vice stocks often outperform, **Small-Cap Sin Stocks** consistently underperform. The bottom quartile of sin stocks by market cap generated a negative alpha of **-1.10% per month** (1970–2016). This suggests that without the protection of monopolistic barriers to entry, companies engaging in morally controversial activities suffer from a "Reputation Tax" that destroys shareholder value.
https://www.sciencedirect.com/science/article/abs/pii/S0304405X09000634We view "Sin" as a scale risk. Philip Morris can afford lawsuits; a small tobacco startup cannot. The data shows that for small and mid-cap companies, engaging in controversial activities is a destroyer of value. Because we often hunt for alpha in the small-to-mid-cap space, applying an ethical screen is not just a moral choice; it is a quality filter that removes companies likely to bleed cash due to reputational headwinds.
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