Ethics in portfolio management: Investor behavior and the profitability of politically incorrect investing.

Summary This thesis investigates the profitability and risk of sin stocks (stocks of companies involved in tobacco, alcohol and gambling) and the impact of the consumption of these products on asset valuation. Vice stocks show abnormal returns, after taking into account market risk and traditional management styles. Through the study of different countries and the use of several valuation models, we are able to highlight new determinants of the performance of these stocks, depending on the environment of the companies. First, there are risk factors, specific to vice companies, that are valued in the European market: the risk of litigation and the risk of increased excise taxes. Second, vice companies in the U.S. achieve risk-adjusted returns only during recessions, thanks to their higher-than-average earnings growth. Finally, the religious environment of investors impacts the profitability of sin stocks, in the sense that Protestants are more "sin-averse" than Catholics and are therefore more likely to disregard these firms. All of these factors are related to the addictive nature of alcohol, tobacco, and gambling consumption, and we show that this addiction has an effect not only on the valuation of vice stocks but also on the valuation of assets in general. We can indeed explain the weak predictive power of the Medaf consumption as well as the risk premium paradox through the stability of addictive consumption.