Abstract
Recent literature suggests that sin stocks (firms engaging in activities related to tobacco, gambling and alcohol) are neglected by a group of institutional investors due to social norms. Sin firms have lower level of institutional ownership, fewer analysts following, higher abnormal returns, and higher financial reporting quality. This paper examines the relation between earnings management and whether a firm is a sin firm or not. Using discretionary accruals as a proxy for earnings management, I find that the magnitude of absolute discretionary accruals is smaller for sin firms as compared to non-sin firms. Furthermore, I find that discretionary accruals are less positive for sin firms compare to non-sin firms. Overall, these results imply that sin firms are less likely to manage their earnings. Specifically, sin firms are less likely to engage in income-increasing earnings management. My findings, along with those of Hong and Kacperczyk (2009) and Kim and Venkatachalam (2011), are consistent with the idea that sin firms are being neglected due to investors' social norms preference, despite the factor that those firms provide better quality earnings, i.e., less earnings management. [PUBLICATION ABSTRACT]