Does the corporate bond market overvalue bonds of sin companies?

Abstract

Several studies have investigated whether there is undervaluation of sin stocks. This undervaluation, it is argued, results in superior sin stock returns compared to non-sin stock returns. Empirical results are mixed. In contrast to the empirical work on sin stock returns, there has been no empirical evidence on sin company bond returns. We investigate the relative performance of bonds of sin companies compared to those of non-sin companies. We find that sin bonds tend to be overvalued, resulting in sin bonds underperforming their non-sin counterparts. We provide possible explanations for this finding for sin bonds in contrast to sin stocks.