Abstract: Negative screening (of ”sin” stocks) is one of the most common strategies used by socially responsible investors. The existing literature identifies sin companies using industry classification codes (IC). We propose an alternative continuous 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. The correlation between the IC and TA sin indicators is only 0.69, with twice as many sin stocks in TA than in IC. TA reveals several important false positive and numerous false negative sin stocks in IC. A sinfulness- weighted portfolio of sin stocks earns an annualized Fama-French 6-factor alpha of 5%. Further tests suggest that the abnormal performance is not explained by crash risk or mispricing, but is significantly related to litigation (legal) risk.

Abstract: We propose a simple approach to synthesize presumably information-driven insider trading signals for the cross-section of stocks. We find that the resulting composite strategy can predict returns, predominantly in equal-weighted portfolios, in our global sample. The results indicate that the benefits of our composite strategy reflect a short-term informational advantage of insiders. Finally, cross-country analysis reveals that varying insider trading restrictions between countries have limited explanatory power for the benefits of the composite strategy.