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

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  • Li, Zhe
  • Massa, Massimo
  • Xu, Niahang
  • Zhang, Hong

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.

Suggested Citation

  • Li, Zhe & Massa, Massimo & Xu, Niahang & Zhang, Hong, 2016. "The Impact of Sin Culture: Evidence from Earning Management and Alcohol Consumption in China," CEPR Discussion Papers 11475, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11475
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    More about this item

    Keywords

    Alcohol; Culture; Earnings management; Geographic shocks;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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