Do Sin Firms Commit Accounting Sins?

• In Event: Do Bad Firms Have Bad Accounting?

Abstract

Social norms keep socially responsible investors away from investing sin firms that sell unethical products and make money from human vice. Exiting literature documents that sin firms are less held by institutional investors and less followed by analysts. This neglect effect leads to higher expected returns than other firms. Our study explores the earnings management behavior of sin firms. The empirical findings suggest that compared to the others, sin firms are more likely to manipulate earnings to slightly exceed thresholds but less likely to report superior earnings. This opportunistic behavior increases the information risk associated with sin firms and contribute to the documented higher expected returns.

Authors

• Hanni Liu, Manhattan College

• Crystal Xu, Manhattan College