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

56 Pages Posted: 30 May 2016 Last revised: 15 Feb 2017

See all articles by Zhe Li

Zhe Li

Renmin University of China

Massimo Massa

INSEAD - Finance

Nianhang Xu

Renmin University of China - School of Business

Hong Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 15, 2016

Abstract

We study how secular culture affects firm behavior when formal institutions fall short. We find that firms more exposed to alcohol-related sin culture exhibit more earnings management and lean their operations more toward local business partners. Tests using latitude and snow/temperature as instruments support a causal interpretation. Moreover, corporate leaders propagate sin culture in society. Finally, sin culture can generate negative externalities by reducing the litigation cost of manipulating information, but significant improvements in formal institutions (e.g., the 2012 anticorruption regulation) may suppress its impact. Our results have important normative implications related to the cultural foundations of corporate (mis)behavior.

Keywords: Culture, Earnings management, Alcohol, Geographic shocks

JEL Classification: G30, M14, P48

Suggested Citation

Li, Zhe and Massa, Massimo and Xu, Nianhang and Zhang, Hong, The Impact of Sin Culture: Evidence from Earnings Management and Alcohol Consumption in China (December 15, 2016). INSEAD Working Paper No. 2017/17/FIN. Available at SSRN: https://ssrn.com/abstract=2786214 or http://dx.doi.org/10.2139/ssrn.2786214

Zhe Li

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Nianhang Xu

Renmin University of China - School of Business ( email )

Beijing
China

Hong Zhang (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

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