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

Using time series consumption data of alcohol, tobacco, and gaming (“sin” products) to proxy for social norm acceptance,, 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 acceptance and that, ceteris paribus, the amount of shareholdings/coverage is more 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 degree of opportunism is more pronounced in the years with poor financial performance. Taken together, these results suggest that social norm levels play a key role in the decision making process and that financial performance has a powerful interaction effect, resulting in social norms being crossed when motive and opportunity exist.