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

Using alcohol, tobacco, and gaming consumption data and people's attitudes toward these sin products to proxy for the social norm acceptance level, we show a strong interaction effect between social norms and financial incentives, which significantly influence the decisions of investment professionals and managers of these sin companies. 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. In addition, managers' opportunistic behavior, proxied by discretionary accruals and analyst meet-or-beat frequencies, is related negatively to the extent of social norm acceptance; and such an association is less pronounced for firms with higher financial 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.