The Impact of Sin Culture: Evidence from Earning Management and Alcohol Consumption in China

Massimo Massa, Zhe Li, Niahang Xu and Hong Zhang

No 11475, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study whether culture plays an important role in affecting firm incentives when formal institutions fall short. We link earnings management to alcohol-related sin culture in China, and we find that firms in regions in which alcohol plays a more prominent role show more earnings management. Tests using the regional gender ratio and snow/temperature as instruments suggest a causal interpretation. Moreover, a high level of alcohol consumption in CEOs’ home region significantly enhances earnings management, suggesting that corporate leaders can transmit and propagate sin culture in society. We also find that firms more exposed to alcohol rely more on local business partners for their operations. Furthermore, culture can generate a negative externality by further reducing the likelihood of fraud detection; however, significant improvements in formal institutions (e.g., the 2012 anticorruption regulation) can suppress this impact. Our results shed new light on the impact of culture on the real economy.

Keywords: Culture; Earnings management; Alcohol; Geographic shocks (search for similar items in EconPapers)
JEL-codes: G30 M14 P48 (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-bec, nep-cse and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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