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Does Religion Mitigate Earnings Management? Evidence from China

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Abstract

Using a sample of 11,357 firm-year observations from the Chinese stock market for the period of 2001–2011, we investigate whether and how religion can mitigate earnings management. Specifically, based on geographic-proximity-based religion variables, we provide strong and robust evidence to show that religion is significantly negatively associated with the extent of earnings management, suggesting that religion can serve as a set of social norms to mitigate corporate unethical behavior such as earnings management. Our findings also reveal that the negative association between religion and earnings management is less pronounced for firms with closer distance to the regulatory centers than for their counterparts, implying the substitutive effects between religion and the distance to regulators (the proxy for regulatory intensity) on mitigating earnings management. The above results are robust to different measures of earnings management, various religion variables, and a variety of sensitivity tests.

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Notes

  1. Using the context of China, Chen et al. (2013) adopt accounting misconduct and discretional accruals as the proxies for corporate governance and then investigate the impact of religious tradition on corporate governance. Chen et al. (2013) find that religion is significantly positively associated with corporate governance.

  2. In Callen et al. (2011), religious observance and religious affiliation at the country or region level are based on the World Values Survey of the World Bank. Moreover, Callen et al. (2011) may not contain firms in mainland China.

  3. We acknowledge our great thanks for one referee’s suggestion that we should explore the differences between our study and extant studies such as Du (2013a, b) and Du et al. (2013a, b).

  4. Du (2013a) documents systematic evidence to show the negative association between religion and owner-manager agency costs and Du (2013b) finds that Buddhism mitigates tunneling to some extent. To sum up, Du (2013a, b) establishes the link between religion and corporate governance, especially owner-manager agency conflicts and agency costs between the controlling shareholder and minority shareholders. Du et al. (2013a) find that religion has positive impact on corporate philanthropic giving and Du et al. (2013b) find that religion is associated with corporate environmental responsibility.

  5. We acknowledge our great thanks to two acute referees for their valuable suggestion.

  6. For example, an essential Buddhist platform is morality (Du 2013b; Esposito et al. 2006; Pace 2013; Wiese 2011). Buddhism teaches desire as a source of suffering (dukkha), interdependence (pratitya-samutpada) and impermanence (anitya), and non-self (anãtman), well known as the three core tenets of Buddhism. And the moral doctrine in Buddhism is synthesized in Four Immeasurables: compassion (karuna), loving kindness (metta), empathetic joy (mudita), and equanimity (upekkha). Du (2013b) has an exhaustive analysis on how three tenets of Buddhism and four Immeasurables affect peoples’ attitude toward ethics.

  7. See the website of CSRC: http://www.csrc.gov.cn/pub/csrc_en/about/.

  8. See websites: (1) http://www.sse.com.cn/lawandrules/sserules/listing/stock/c/c_20120918_49621.shtml; and (2) http://www.szse.cn/main/images/2012/07/07/20120707165902322.pdf.

  9. We acknowledge our great thanks to one referee for his/her valuable suggestion as below: (1) We should discuss why we choose three regulatory centers as the basis to define regulatory intensity and (2) We should explore other values of Beijing, Shanghai, and Shenzhen as three regulatory centers.

  10. See the website of CSRC: http://www.csrc.gov.cn/pub/csrc_en/about/. Thirty-six regional bureaus accept commission to supervise listed firms in their respective provinces or cities. And then, using a vertical pattern, CSRC oversees regional bureaus. Moreover, CSRC has established Shanghai and Shenzhen Commissioner Offices.

  11. See the CSRC website. http://www.csrc.gov.cn/pub/tianjin/xxfw/scyw/201310/t20131024_236822.htm. During our sample period (2001–2011), the regional offices only take the daily inspection and carry out the command from the superior. Today, CSRC begins to streamline the administration and delegates real powers to lower levels.

  12. See the following website: http://www.zyen.com/PDF/GFCI6.pdf.

  13. Some extant studies use a dummy variable, which indicates whether a firm’s ultimate owner is a central/local government or government-controlled enterprises, to distinguish SOEs from non-SOEs. However, a branch of thin but growing literature (Chen et al. 2006; Xiao and Yuan 2007) uses the percentage of state shareholding as the proxy to investigate the difference in corporate behavior between two subsamples. Following Chen et al. (2006) and Xiao and Yuan (2007), we investigate religious influence on earnings management among different percentages of state shareholding.

  14. We acknowledge our great thanks to one anonymous referee for his/her valuable suggestion on controlling the regional institutional characteristics in our regression.

  15. See “The report on nation-widely famous Buddhist monasteries and Taoist temples in Han area” for the detailed list.

  16. We are especially grateful to one referee for his/her suggestion that we should use the location of regulators’ regional offices as the benchmark to calculate the distance and define REGLIST. The non-tabulated results show that it has no influence on corporate earnings management. The results are available from the author upon request.

  17. The results remain qualitatively similar if we include deleted firm-year observations based on criteria (2)–(3) and introduce two dummy variables (i.e., NEWLIST and ST) into regressions.

  18. Extant studies (Chen and Yuan 2004; Haw et al. 2005) find that earnings management is related to corporate seasoned equity offering in China. As time went by, the regulators realized the loopholes of rules and the supervision on equity offering became rigorous. For example, in 2002, the CSRC enacted a policy to conduct a closer scrutiny on the firms before issuing stock. Firm could no longer use the below-the-line items to manipulate the earnings. So perhaps earnings management for stock issuance gets deterrent for the samples during our sample period (2001–2011).

  19. Theoretically, the relation between accruals and cash flows is negative. Referring to Chinese contexts, consistent with Chen et al. (2011), we fail to find the negative relation between the accruals and cash flow. Similar to Kim et al. (2003), the coefficient on one-period lagged discretionary accrual is positive. The possible explanation is that accruals may reverse over time, and managers may conduct earnings manipulation for several years.

  20. We acknowledge our great thanks to Reviewer #2 for his/her valuable suggestion on this robustness check.

  21. We acknowledge our great thanks to two anonymous referees for their valuable suggestion that we should discuss differences in religious influence between SOEs and non-SOEs or considering different proportions of state ownership.

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Acknowledgment

We are especially grateful to the section editor (Prof. Domènec Melé) and two anonymous reviewers for their many insightful suggestions and constructive comments. We also appreciate constructive comments from Donghua Chen, Guohua Jiang, Yingying Chang, Wentao Feng, Quan Zeng, and participants of our presentations at Xiamen University, Anhui University, Anhui University of Technology, Ocean University of China, Shandong University, and Shanghai University. Professor Xingqiang Du acknowledges financial support from the National Natural Science Foundation of China (approval number: 71072053), the Key Project of Key Research Institute of Humanities and Social Science in Ministry of Education (approval number: 13JJD790027), the Specialized Research Fund for the Doctoral Program of Higher Education of China (approval number: 20120121110007), and Xiamen University’s Prosperity Plan Project of Philosophy and Social Sciences (sub-project for Center for Accounting Studies and School of Management). Yingjie Du acknowledges financial support from Youth Project of Humanities and Social Science Research of Ministry of Education (13YJC790022).

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Authors and Affiliations

  1. Accounting Department, School of Management, Xiamen University, Xiamen, 361005, Fujian, China

    Xingqiang Du

  2. Xiamen National Accounting Institute, Island-Coast Express, Xiamen, 361005, Fujian, China

    Wei Jian

  3. School of Management, Xiamen University, Xiamen, 361005, Fujian, China

    Shaojuan Lai & Hongmei Pei

  4. School of Management, Shanghai University, Shanghai, 200444, China

    Yingjie Du

Authors
  1. Xingqiang Du
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  2. Wei Jian
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  3. Shaojuan Lai
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  4. Yingjie Du
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  5. Hongmei Pei
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Corresponding author

Correspondence to Wei Jian.

Appendix

Appendix

See Table 12.

Table 12 Variable definitions
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Du, X., Jian, W., Lai, S. et al. Does Religion Mitigate Earnings Management? Evidence from China. J Bus Ethics 131, 699–749 (2015). https://doi.org/10.1007/s10551-014-2290-9

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