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3.1 Background and selection of sin stocks

Various industries are treated as if they include sin companies. Therefore, it is essential to define what is sin stock. The commonly known websiteInvestopedia defines sin stocks as follows: “A sin stock is a publicly-traded company involved in or associated with an activity that is considered unethical or immoral. Sin stocks are generally in sectors that deal directly with morally dubious actions. They are perceived as making money from exploiting human weaknesses and frailties.”

There are various industries, such as the defense industry, that are accounted as sinful or unethical from some group’s point of view. However, each investor has their own definitions of sinful which may include only proportion or every stock. Thus, my analysis of sin stocks focuses on the industry

group known as the “Triumvirate of Sin”, which includes alcohol, tobacco and gambling. One commonly added industry related to sin stocks is the defense industry. For instance, the Vitium Global Fund – a mutual fund investing entirely in sin stocks - has a defense industry in its portfolio in addition to alcohol, tobacco and gambling. However, as the defense industry does not share the same traits as other sin industries, I will not add it to my analysis. Firstly, according to Salaber, (2009) the defense sector across Western Europe includes various companies with broad product or service portfolios and therefore it is difficult to define these companies. Second, alcohol and tobacco consumption, as well as gambling are collectively considered as sinful activities that have a significant burden to society, whereas the defense industry is seen even essential on some occasions. Third, alcohol, drinking and gambling all inflict addictive behavior, causing high external costs in terms of healthcare and having limited substitutes. Other industries that are considered sinful include crime, marijuana and payday loan industries. These companies are not added to my analysis as there are little to no public companies in these fields of business.

It is important to note that what is seen as a sin stock can change over time. Companies defined as sin stocks can change their product mix or revenue sources that can lead to reclassification. For instance, Blitz and Fabozzi (2017) discuss in their paper that Heineken and Anheuser Bush have announced plans to aggressively promote their non-alcoholic beer. The shift can also be contrary as tobacco was initially treated as an effective medicine. This was because the health consequences of tobacco were not generally known until the 1960s when there was a released report that tobacco causes lung cancer.

From the Western-European countries, I pick all tobacco industry companies, alcohol beverage companies and gambling companies, which are listed in exchange during the period. To identify the sin companies in my sample, I use the Fama French (1997) classification of stocks based upon their Standard Industrial Classification (SIC) codes into 48 industries. SIC codes are four-digit numerical codes that categorize the industries that companies belong to depending on their business activities (Investopedia). Alcoholic Beverages are under the SIC codes 2080-2085 while tobacco products are under codes 2100-2199. There are no SIC codes for gambling or casino industries but according to Troberg (2016) they are usually categorized as 7999 “Miscellaneous entertainment”. To identify the gambling stocks, I use Datastream’s industrial classification

“Casinos & Gambling” and find that most of them are categorized under SIC code 7999.

Over the entire period, there are 172 sin stocks distributed as follows: 97 stocks belong to the alcohol sector, including brewers Heineken and Anheuser-Busch InBev which own well-known brands such as Sol and Budweiser, as well as distilleries and vintners, like Pernod-Ricard and Diageo, owner of some of the world’s most famous drink brands, such as Captain Morgan and Smirnoff Vodka; 6 stocks belong to tobacco sector, including tobacco manufacturers such as British American Tobacco, who owns familiar brands such as Pall Mall and Northstate; 69 stocks in gambling industry including firms such as The Société des Bains de Mer, which owns multiple casinos and hotels including Casino de Monte Carlo in Monaco and gambling companies providing online-betting services such as Entail and Flutter Entertainment. A low number of tobacco stocks is due to the oligopolistic nature of the tobacco industry - there are only a few major players that dominate the industry - and in Western European countries these companies either have long-established dominance or have acquired the main domestic producers.

A low number of sin stocks is because of the fact many of the sin companies are not public. All 172 stocks are not present at the same time in the study. Table 1 shows industry-specific distribution each year. The table shows that there has been decreasing trend in the number of sin stocks, which can be due to major players acquiring smaller companies. The most sin stocks are in the United Kingdom, Germany and France. A list of companies is presented in Appendix A.

Table 1. Distribution of sin stocks by year

Year Alcohol Tobacco Gambling Total

2012 45 3 33 81

2013 47 3 28 78

2014 48 3 29 80

2015 48 3 27 78

2016 46 3 26 75

2017 43 3 25 71

2018 42 3 21 66

2019 41 3 20 64

2020 38 3 19 60

2021 38 3 16 57

3.2 Market data

I obtain my data from Thomson Reuters Datastream. I include in my market sample all common stocks from the following 10 countries located in Western Europe: Austria, Belgium, Czech Republic, France, Germany, Ireland, Luxembourg, Netherlands, Switzerland and United Kingdom. Two Western-European countries have been removed from the sample (Liechtenstein and Monaco) because there are no publicly traded companies for these countries. From the sample, I exclude financial companies since they are constrained by strict regulation and these industries differ significantly from other industries. I also exclude stocks that have no available data during the period. I include in the sample the companies that disappear during the period. Disappeared stocks are either delisted, defaulted or merged. Thus, the data is free of survivorship bias. After cleaning the dataset, I have a sample of 7015 stocks across the Western European countries, over 261 months. From the companies, I retrieve the monthly return index, market capitalization and price-to-book value (inverse of book-to-market). Return index shows theoretical growth in value, assuming that dividends are reinvested to purchase additional units of equity at the closing price applicable on the ex-dividend date. Additionally, return index takes into consideration stock splits.

Market values are obtained in the euro rate to avoid any currency effects. I ignore transaction and brokerage costs in my analysis, following the same practice as prior studies.

3.3 Risk-free rate

For risk-free rate I follow Troberg’s (2016) practice and use a 10-year government bond of Germany. Germany can be considered economically as the most reliable country in Western Europe. To use the German interest rate, I must assume that there is no country risk. I test my results using several Western European interest rates and the results stay unchangeable. I consider the German bond’s monthly yield-to-maturity to be an appropriate estimate for Western-European risk-free rate because of Germany’s financial stability and the robustness of results when using other countries’ interest rates.