The price of sinful behavior window dressing: Cultural embeddedness on cigarette packages and financial reporting quality

Abstract

Using hand-collected data from China, we examine whether cultural embeddedness on cigarette packages affects corporate financial reporting quality, and further investigate the moderating effect of foreign directors. The findings reveal that firms in provinces with more cultural embeddedness on cigarette packages exhibit significantly higher extent of discretionary accruals. This finding suggests that cultural embeddedness on cigarette packages as a tobacco-related sinful behavior window dressing shapes unethical social atmosphere, elicits unethical managerial behavior, brings out information distortion, and eventually reduces financial reporting quality. Moreover, the positive relation between cultural embeddedness on cigarette packages and discretionary accruals is less pronounced for firms with foreign directors than for their counterparts. Furthermore, our findings are robust to a variety of sensitivity tests using alternative proxies for cultural embeddedness on cigarette packages and financial reporting quality, and further our conclusions still stand after employing the difference-in-difference approach, two-stage least square regression procedure and two-stage Heckman method to address the endogeneity problem. Lastly, pictorial health warnings on cigarette packages are significantly negatively related with country-level smokers, but cultural embeddedness on cigarette packages is significantly positively associated with tobacco consumption at the province level and owner-manager agency costs in China, providing supportive evidence to our findings.