The past few years have seen a growing interest from financial institutions for socially responsible investing (SRI). At present, more than 3000 institutional investors have signed up to an agreement known as the Principles for Responsible Investment (PRI), which is an agreement to incorporate socially responsible considerations in their investment analysis and decision-making process. The total assets managed by these investors have hit a record high at $113 trillion. 1 SRI is an investment strategy dependent on the social rules. 2 In this paper, we hope to offer new data on the impact of social norms on institutional investors’ portfolio decision-making. In particular, we investigate the extent to which the experience of a company’s leadership influences an insurance company’s decision to invest in “sin” industries, such as tobacco, alcohol, and gaming. This is a perfect setting to study the impact of cultural norms on investments for various reasons.

There is an established social norm that prohibits funding companies in sinful industries that encourage human vice. Consumption of tobacco, alcohol, and gaming is viewed as evil in recent times because of their addictive qualities as well as the potentially negative social implications when they are consumed excessively. Insurance companies are aware of the pressures of social norms due to their various constituencies and their exposure to scrutiny from the public (Hong and Kacperczyk, 2009; Liu et al., 2014; Luo and Balvers, 2017). Then, Benabou and Tirole (2010) assert that SRI is a way to reveal directors’ and managers’ own motivations to participate in charitable giving. The investments could be a reflection of the ethics or values of its management. We concentrate on the experience of military personnel under solid leadership because the military instills the core values of morality, respect, responsibilities, and obedience to orders into its employees and creates a distinct impression on veterans, which sets their experience apart from the civilian. (Akerlof and Kranton 2005; Franke, 2001; Soeters, 1997; Stevens et al. 1994). These values influence people’s decisions and actions and can have a lasting impact on their lives (Elder, 1986; Elder et al., 1991; MacLean and Elder, 2007). Thus, leaders of companies who have a military background are more likely to follow social norms and feel morally obligated to make ethical and socially responsible choices. Additionally, Hong and Kacperczyk (2009) assert that sin-based companies tend to finance their operations using debt rather than equity due to the opaqueness of the debt market. Insurance companies are among the biggest corporate holders of corporate debt (Becker and Ivashina 2015). Therefore, a study of their investment behavior in sin-based companies can provide valuable insight into the financial institutions as well as SRI.

Utilizing a unique data set of Property-casualty (P/C) insurance firms’ portfolio holdings, which include both corporate bonds and stocks, we conclude that insurers who have the military’s leadership (management and boards) tend to be less inclined to make investments in sin companies as opposed to insurers with no military leadership. Military leadership related to a lower proportion of sin-related companies within insurers’ portfolios and particularly in the allocations of bonds issued by corporations. Our findings suggest that military leaders who are infused with moral values, have high ethical standards, and abide by guidelines contribute to strengthening the norms of society in the allocation of assets made by insurers and discourage investment in industries that are sinning. Furthermore, the reduced influence of military authority on sin-related investments is evident in the wake of the financial crisis. Institutional investors are more likely to ignore social norms and shift their portfolios towards sin-related companies that are invulnerable to recession (Fabozzi and Co. 2007).

Our research contributes to the expanding literature on investing in sinful companies. First, the research focuses on the dilemma that investors face between adhering to the social norms of society and trying to gain the lucrative financial benefits of sin businesses. (Cumming and Johan, 2007; Fu et al., 2020; Geczy et al., 2021; Liu et al., 2014). In this study, we show how the existence of military leaders increases the adherence of insurance companies to social norms and hinders the use of portfolios for sin-related companies, particularly in the current financial crisis. The majority of studies on sin investments rely exclusively on sin stocks (e.g., Fauver and McDonald, 2014; Hong and Kacperczyk, 2009). 3 We extend this strand of research by incorporating sin bonds and discover that the effect of reducing military leadership is seen in both asset classes and is particularly evident when it comes to sin bonds. Our results offer valuable insight into the sin of investing, given the fact that insurance companies are among the biggest institutional investors in corporate bonds. In contrast, in companies tend to be more likely to respond to loans (Hong and Kacperczyk Hong and Kacperczyk, 2009).

Our research also contributes to the existing literature on the effects that veterans have on the policies of corporations. Leaders of companies with military experience tend to be more than tolerant of unethical or unintentional actions like financial errors or earnings management, overpaying, fraudulent practices, as well as excessive tax planning (Benmelech and Frydman (2015); Cai et al. 2021; Koch-Bayram, Wernicke (2018); Law and Mills, 2017). In addition, Cai et al. (2022) prove that military directors encourage firm engagement in CSR. We present new evidence on how military leadership affects the investment behavior of insurance companies to be in line with social standards.

Section A few snippets

Data and setup for empirical research

Our sample is comprised of 455 properties and casualties (P/C) insurance firms with 3732 observations of their firm years between 2004 and the year 2016. We study the relationship with the existence of military leadership as well as sin investments made by insurance companies using the following regression specifications.

Dependent variable forms among our sin-investment measures. To create these measures, we first gather information on the investments of insurance companies through Schedule D in

Conclusion

We examine the investment decisions made by insurance companies within the sin industry that is involved in producing tobacco, alcohol, and gaming. We discover that insurers with military leaders have a lower likelihood to invest in bonds and stocks issued by sin corporations as opposed to insurers with no army leadership. Reduced risk is bigger in the current financial crisis when insurers are under greater pressure to compromise social norms to gain economic benefits. Our research suggests that military.