Does Religion Mitigate Tunneling? Evidence from Chinese Buddhism

In the Chinese stock market, controlling shareholders often use inter-corporate loans to expropriate a great amount of cash from listed firms, through a process called “tunneling.” Using a sample of 10,170 firm-year observations from the Chinese stock market for the period of 2001–2010, I examine whether and how Buddhism, China’s most influential religion, can mitigate tunneling. In particular, using firm-level Buddhism data, measured as the number of Buddhist monasteries within a certain radius around Chinese listed firms’ registered addresses, this study provides strong evidence that Buddhism intensity is significantly negatively associated with tunneling. This finding is consistent with the view that Buddhism has important influence on corporate behavior and can serve as a set of social norms and/or an alternative mechanism to mitigate controlling shareholders’ unethical tunneling behavior. In addition, my findings also reveal that the negative association between Buddhism intensity and tunneling is attenuated for firms that have high analyst coverage. The results are robust to various measures of Buddhism intensity and a variety of sensitivity tests.