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

68 Pages Posted: 6 Sep 2016

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: August 2016

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: Alcohol, Culture, Earnings management, 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 Earning Management and Alcohol Consumption in China (August 2016). CEPR Discussion Paper No. DP11475. Available at SSRN: https://ssrn.com/abstract=2834812

Zhe Li (Contact Author)

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

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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