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

53 Pages Posted: 4 Apr 2014  

Yanju Liu

Singapore Management University - School of Accountancy

Hai Lu

Singapore Management University; University of Toronto - Rotman School of Management

Kevin J. Veenstra

McMaster University - DeGroote School of Business

Date Written: March 31, 2014

Abstract

Using alcohol, tobacco, and gaming consumption data and people’s attitudes toward these sin products to proxy for social norm acceptance levels, we show a strong interaction effect between social norms and financial incentives, which significantly influence the behavior of market participants. Specifically, institutional investors’ shareholdings and analyst coverage of sin companies increase with the degree of social norm acceptance. The association between shareholdings/coverage and social norm acceptance is less pronounced for firms with higher future expected performance. Our results show 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 (March 31, 2014). Accounting, Organizations and Society, Forthcoming; Rotman School of Management Working Paper No. 2419667; Singapore Management University School of Accountancy Research Paper No. 2015-21. Available at SSRN: https://ssrn.com/abstract=2419667

Yanju Liu

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Hai Lu (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore 178900
Singapore

University of Toronto - Rotman School of Management ( email )

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

Kevin J. Veenstra

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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