Is Sin Always a Sin? The Interaction Effect of Social Norms and Financial Incentives on Market Participants’ Behavior

60 Pages Posted: 18 Jan 2011

See all articles by Yanju Liu

Yanju Liu

University of Toronto - Rotman School of Management

Hai Lu

University of Toronto - Rotman School of Management

Kevin J. Veenstra

McMaster University - DeGroote School of Business

Date Written: January 16, 2011

Abstract

Using alcohol, tobacco, and gaming consumption data and people’s attitudes toward these sin products to proxy for the social norm acceptance level, we examine how social norms affect the decisions of investment professionals and managers of these “sin” companies. We find that institutional investors’ shareholdings and analyst coverage of “sin” companies are increasing in the degree of social norm acceptance and that the association between shareholdings/coverage and social norm acceptance is less pronounced for firms with higher future expected performance. We also show that managers’ opportunistic behavior, proxied by discretionary accruals and analyst meet-or-beat frequencies, is negatively related to the extent of social norm acceptance and that the association between the degree of opportunism and social norm acceptance is less pronounced for firms with higher financial performance. Our results suggest that social norms and financial incentives have a powerful interaction effect in determining the behavior of market participants, suggesting that social norms can be crossed when motive and opportunity exist.

Keywords: Social norms, financial incentives, sin stocks.

JEL Classification: G11, D71, M40.

Suggested Citation

Liu, Yanju and Lu, Hai and Veenstra, Kevin J., Is Sin Always a Sin? The Interaction Effect of Social Norms and Financial Incentives on Market Participants’ Behavior (January 16, 2011). CAAA Annual Conference 2011, Available at SSRN: https://ssrn.com/abstract=1742086 or http://dx.doi.org/10.2139/ssrn.1742086

Yanju Liu

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Hai Lu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Kevin J. Veenstra

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
4
Abstract Views
295
PlumX Metrics