Keeping Them Honest: The Long-term Effects of Protestant Missionaries on Honesty and Corporate Tax Avoidance in Modern China

Abstract

Combining datasets on the 1920 Protestant diffusion in China and the financial reports of about 125,000 Chinese industrial firms from 1999 to 2007, we find significant effects of historical Protestant activities on current corporate tax avoidance. We then use disaster frequency as the instrumental variable to establish causality. Analysis of the survey-based CFPS data and a peer-to-peer lending dataset with more than one million borrowers shows that people from cities with more historical Protestant activities tend to trust others more and have better credit records. By illustrating the role of Protestantism in fostering social capital, our analysis suggests persistent effects of religion on individual and corporate behaviors.