Why Does It Feel So Good To Be Bad? An empirical analysis of traditional and modern sin stock returns in developed countries from January 2000 to August 2022
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- Master Thesis 
This study aims to give managers and investors a better financial basis to assess whether they should be exposed to sinful companies. Accordingly, this thesis examines the presence of alpha for sin stocks in developed countries between January 2000 to August 2022. The study expands on previous research and applies a contemporary definition of the sin industry that considers oil and gas companies. Additionally, the study expands the observation period and the geographical area beyond what has already been done and includes stricter stock criteria. With 412 identified stocks for developed countries, this thesis has one of the most extensive sin stock samples to be analysed to date. Multi-factor models are applied to control for risk exposure variations between different valueweighted portfolios. We estimate alphas by exploiting a long-short investment strategy by which we are long sin and short in the market and then 2) short in the comparable portfolio. Our results demonstrate an economically large and statistically significant alpha for both the traditional and modern sin portfolio in excess of the market. The market risk-, profitability, and investment factors explain the abnormal returns to some extent. Among the traditional sin industries, gambling offers the highest alpha. However, the other industries also outperform the market. For modern sin stocks, the value factor is crucial in explaining abnormal returns over the entire period. Results detect an increase in modern sin stock alpha ex-post the divestment movement, where the profitability factor explains some of the return premium. When we apply the second long-short investment strategy for both traditional and modern sin stocks we find no evidence of alpha. Thus, investors might earn a similar risk-adjusted return if they invest in a comparable portfolio. Nevertheless, the expected excess return over market return is more remarkable for sin stocks when compared against the non-sinful companies.