Negative screening (of ”sin” stocks) is the most common strategy used by socially responsible investors. The existing literature identifies sin stocks using industry classification codes (IC). We propose an alternative measure of firms’ exposure to sin activities (sinfulness) based on textual analysis (TA) of their annual reports. Sinfulness captures both cross-sectional and time-series variation in firms’ exposure to sin activities. TA reveals several important false positive and numerous false negative sin stocks in IC. A sin-weighted portfolio of sin stocks earns an annualized Fama-French 6-factor alpha of 4%. Overall, our study highlights important shortcomings of using IC to identify sinful firms and resurrects the sin premium, that is, more sinful stocks have higher expected returns.

Keywords: Business social responsibility, Sin stocks, Textual analysis.