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

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