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

Can Protestantism make people more honest? If yes, what does this mean for corporate behaviors and economic performance? Marshalling large and unique 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 use disaster frequency as the instrumental variable to establish causality. Using data from the China Family Panel Studies and a peer-to-peer lending dataset containing the credit scores of over one million Chinese borrowers, we further find that individual honesty is the key social capital fostered by Protestantism in reducing tax avoidance. Our empirical results show that people from cities with more intense Protestant activities historically tend to have higher credit scores and trust others more. Our analyses suggest that religion may play a significant role in shaping individual and corporate behaviors, and that such effects tend to persist