Unethical Investments in the 21st Century: An Investigation of Unethical Stocks on the US-stock Market from 1999 to 2023

Abstract

This thesis investigates whether a U.S.-based investor can achieve abnormal excess returns by exclusively investing in a diversified portfolio of unethical stocks and under what circumstances such a strategy can prove efficient. Utilizing a robust multivariate regression framework, the study spans 25 years, from 1999 to 2023, and assesses returns through the lens of both traditional and advanced financial models, including CAPM, Fama-French three- factor, five-factor, and Betting Against Beta models. Despite initial indications of significant alpha in simpler models, this thesis reveals that when adjusting for a broader set of economic factors, the apparent advantages of investing in unethical stocks, such as those from industries traditionally viewed as unethical like alcohol, defense, tobacco, and gambling, diminish. This outcome challenges the perception that these stocks might serve as a reliable hedge during economic downturns, as the alpha associated with these investments does not persist in more complex models. The research confirms that while unethical investments can outperform in specific models, their success is contingent upon economic cycles and firm characteristics, rather than inherent attributes of the stocks. These findings contribute to the broader discourse on the efficiency of the markets, ethical and unethical investing practices, and how market's evolving dynamics and investor's ethical considerations can influence the viability of investment strategies.